Schwab Settles Mutual Fund Case Related to Sub-Prime Mortgages

April 21, 2010

Charles Schwab Corp. agreed to pay $200 million to shareholders of the Schwab YieldPlus Fund ("Bond Fund") who had filed class action suits (later consolidated) against the company between March and May 2008.

The plaintiff shareholders had alleged that Schwab misrepresented key characteristics of the Bond Fund in regulatory filings, disclosures and marketing.  Specifically, they alleged that Schwab deceived them about the underlying risks and liquidity issues associated with the mortgage-backed securities.

The Bond Fund, an ultra-short bond fund, is designed to invest in a variety of fixed income instruments, including corporate bonds, asset-backed securities, mortgage-backed securities, and other fixed-income investments.  The credit crisis that began in mid-2007 led to a decline in the value of a majority of fixed-income investments market wide, including the mortgage-backed securities held by the Bond Fund, which made up approximately half of its portfolio. As a result, certain Schwab shareholders who chose to invest in the Bond Fund experienced a decline in their investments, leading to the litigation.  The Bond Fund lost 35% in 2008 as the credit markets fell, and then a further 10.5% in 2009.

Plaintiffs in the case had been claiming up to $890 million in damages. On March 31, 2010, a federal district court judge in San Francisco issued a summary judgment ruling out liability in one aspect of the case.  That court ruled that the Bond Fund, which had invested more than 50% of its assets in mortgage-backed securities, impermissibly changed its industry concentration policy without a shareholder vote when it changed its industry classification policy from stating that mortgage-backed securities constituted an industry to stating that they did not.  However, the court later issued a ruling on April 8, 2010 that denied an effort by Schwab to have the case dismissed.

Click to access the press release about the settlement.


Investment Advisers, Judicial, Mutual Funds