Schwab May Pay $260 Million on Fund Losses
Charles Schwab, the largest U.S. online brokerage firm, may pay $260 million (about half a quarter's profit) to settle investors' claims over losses in YieldPlus, a bond fund with sub-prime mortgage holdings.
Schwab is the defendant in eight proposed class-action suits which accuses the firm of misleading investors by describing its YieldPlus mututal fund in prospectuses as only "marginally" riskier than cash when risky mortgage-related securities actually accounted for more than half of the fund's value. Separately, Schwab also faces arbitration claims and individual investor lawsuits.
YieldPlus was the nation's largest short-term bond fund, with a peak worth of $13.5 billion last July. The ultra-short bond fund holds assets for a year or less and was designed for high dividend yields and minimal share price changes. However, losses in July and August last year sparked redemptions and forced Schwab to sell securities at a loss; investors lost $1.3 billion between July and April of this year.
The exorbitant losses and the lawsuits are a blow to Schwab's image as a wholesome broker-dealer and would likely hurt the big online business they've cultivated. Schwab is under pressure to settle and the payout could win some public relations points back for Schwab.
Schwab has started offering some clients from 50 percent to 90 percent of losses under $10,000. For losses of $50,000 or more, offers have been 5 to 20 percent. Some note that Schwab seems to be paying a higher percentage to people who are retired or not sophisticated in the financial markets.
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