November 18, 2010
Posted in: SEC | Greedy Brokers | Breach of Fiduciary Duty | Risky Investments
After a week of arguments between lawyers on both sides, Charles Schwab agreed to repay investors of its YieldPlus Fund as part of a $235 settlement with the state of California.
Earlier this week Charles Schwab decided to withdraw its settlement offer, which had been negotiated last spring in order to prevent a class-action suit against the broker-dealer.
Today the New York Times ran an in-depth feature on the Securities and Exchange Commission's investigation into the YieldPlus Fund:
The Schwab YieldPlus Fund was supposed to be safe - "a smart alternative for your cash," the pitch went.
But like so many seemingly secure investments, the mutual fund plunged in value when the financial crisis struck - and the Charles Schwab Corporation is still struggling to contain the damage.
The Securities and Exchange Commission is examining whether Schwab misled its customers about YieldPlus, which, it turned out, was packed with riskier mortgage investments, according to a person with direct knowledge of the investigation. Federal investigators are also looking into similar funds managed by Bank of America and Citigroup, this person said.
If this all sounds a bit familiar, that is because it is. How much banks and others did - or did not - disclose about the risks associated with certain investments has been a big issue on post-bailout Wall Street. Several other banks and investment companies have settled claims that they hoodwinked investors about certain securities or funds in the heady days before the collapse.
But unlike, say, collateralized debt obligations sold by the likes of Goldman Sachs, Schwab's YieldPlus fund was aimed not at savvy institutional investors but at individual savers. The S.E.C. is also examining certain C.D.O. sales practices at Deutsche Bank, JPMorgan Chase and Morgan Stanley, but those inquiries largely involve big, sophisticated institutions.
After Charles Schwab had withdrawn their original settlement offer earlier this month, the broker-dealer issued a press release which blamed market volatility, adding "YieldPlus shareholders lost, on average, only 7.5 percent of their investment when dividends are counted."
But as the Times noted, the main issue of the SEC's investigation was how YieldPlus Fund was advertised and sold. Charles Schwab sold YieldPlus specifically to unsophisticated, individual investors, telling them this was a stable short-term bond.
Since YieldPlus Fund consisted of 45 percent mortgage-backed securities, it is no wonder why investors would lose money following to the 2007 housing collapse.
