San Francisco, California -- Charles Schwab & Co. and its former high-profile fund manager engaged in deception and dishonest conduct when they misrepresented the Schwab YieldPlus Fund and the Schwab California Tax Free YieldPlus Fund as safe investments for investors seeking to protect their principal. In fact, the funds' high concentrations in risky and mostly illiquid securities exposed investors to the risk of substantial losses of principal, according to an arbitration claim filed today on behalf of a retired California couple.
The couple, a retired corporate executive and his wife, lost more than $300,000 in the funds (SWYSX and SWYCX), which were marketed by Charles Schwab as "cash alternatives" with safety akin to money market funds and certificates of deposit. The couple, a retired corporate executive and his wife, lost more than $300,000 in the funds (SWYSX and SWYCX), which were marketed by Charles Schwab as "cash alternatives" with safety akin to money market funds and certificates of deposit.
"It is particularly disturbing that many of the investors in SWYSX and SWYCX are elderly investors and retirees," said Thomas D. Mauriello, a California investor rights attorney who filed today's claim along with former SEC enforcement attorney Thomas Shine and investor rights attorney Christopher Vernon. "These investors were not interested in risk. With respect to the Schwab California Tax-Free YieldPlus Fund, they expected a low-risk fund to generate modest tax free income. Instead, they suffered significant losses to their principal because the fund was dramatically riskier than Charles Schwab represented it to be."
The claim accuses Charles Schwab of failing to disclose or misrepresenting the risks associated with the concentration of the Schwab YieldPlus Fund in high-risk mortgage and asset-backed securities. This concentration compromised the liquidity of the fund and forced it to sell off asset-backed and mortgage-backed securities at distressed prices as more and more investors sought redemptions beginning in August 2007, the claim asserts.
Illiquidity coupled with investor redemptions plunged the Schwab YieldPlus Fund into a catastrophic free-fall: The fund saw net assets peak at $13.5 billion on July 31, 2007 and by May 31, 2008, the fund's assets had plunged by more than 96 percent to $507 million.
In the Schwab California Tax Free YieldPlus Fund, Schwab fund managers put increasing portions of the fund's portfolio assets into auction rate securities and floating rate bonds. These investments compromised the liquidity of the Schwab California Tax Free YieldPlus Fund and contributed to the funds' decline in the face of large investor redemptions, the claim asserts. The SWYCX fund's total managed assets plummeted from $1.2 billion as of July 31, 2007 to $157 million just 13 months later.
The claim filed today effectively alleges that Schwab and former fund manager Kimon Daifotis engaged in misconduct when they embarked on a damage control campaign to avoid liquidations of the Schwab Yield Plus Fund by Schwab clients while, behind the scenes, Schwab dumped 2.9 million Schwab YieldPlus Fund shares from the portfolios of other Schwab proprietary mutual funds.
These deceptive tactics effectively encouraged customers to hold on to their shares allowed Schwab's broker-dealer arm and fund manager Daifotis to liquidate Schwab YieldPlus Fund shares from other Schwab mutual funds and obtain better selling prices ahead of their own retail customers, according to the claim.
Securities fraud litigators in the Shine-Vernon legal team have now filed claims on behalf of both corporate and individual Schwab YieldPlus Fund investor clients in California, New York, Texas, Florida, Missouri, Minnesota, Illinois and Hawaii, and they are currently investigating claims on behalf of investors in multiple other states. The team includes former SEC enforcement attorneys, former federal and state prosecutors, and investor rights attorneys from California, New York, Florida, Texas and Illinois.
Contact:
Thomas F. Shine, a former Securities and Exchange Commission ("SEC") Division of Enforcement attorney (Florida, 800-838-8320, www.thomasfshinelawblog.com);
Read this story on MSNBC
