Results tagged “arbitration.” from Thomas F. Shine Law Commentary

As Underwriter of the Schwab YieldPlus Fund, Charles Schwab Had a Due Diligence Duty to Ensure the Accuracy and Completeness of the Representations Made in the Prospectus

By
Sara
on November 19, 2009 10:51 AM |
On Sept. 30, 1999, Charles Schwab acted as the sole underwriter in the initial public offering of the Schwab YieldPlus Fund.

 

Schwab Investments, Inc., the issuer of the Schwab YieldPlus Fund and an affiliate of Charles Schwab, revises and disseminates an updated prospectus for the Schwab YieldPlus Fund at least annually.

 

At all relevant times, Charles Schwab, as the underwriter of the Schwab YieldPlus Fund, had an ongoing due diligence duty to make a reasonable investigation to assure itself that the representations made in the fund's registration statement and prospectus were accurate and complete.  See, e.g., In re Brown, Barton & Engel, 43 S.E.C. 43 (1966); In re Amos Treat & Co., Inc., 42 S.E.C. 99 (1964). The Securities and Exchange Commission has set forth the following guidance regarding the due diligence duties of underwriters:

 

"It is a well established practice, and a standard of the business, for underwriters to exercise diligence and care in examining into an issuer's business and the accuracy and adequacy of the information contained in the registration statement.  By associating himself with a proposed offering, an underwriter impliedly represents that he has made such an investigation in accordance with professional standards.  Investors properly rely on this added protection which has a direct bearing on their appraisal of the reliability of the representations in the prospectus.  The underwriter who does not make a reasonable investigation is derelict in his responsibilities to deal fairly with the public." In re Richmond Corporation, 41 S.E.C. 398, 406 (1963).

 

"[An underwriter] owe[s] a duty to the investing public to exercise a degree of care reasonable under the circumstances of th[e] offering to assure the substantial accuracy of representations made in the prospectus and other sales literature."  In re Charles E. Bailey & Company, 35 S.E.C. 33, 41 (1953).


The Seventh Circuit Court of Appeals in Sanders v. John Nuveen & Co., 524 F.2d 1064, 1069-70 (7th Cir. 1975), vacated and remanded on other grounds, 425 U.S. 929, 96 S.Ct. 1659, 48 L. Ed. 2nd 172 (1976), further elaborated upon the rationale for imposing upon underwriters the due diligence duty to investigate the accuracy and completeness of the issuer's representations as follows:

"An underwriter's relations with the issuer gives the underwriter access to facts that are not equally available to members of the public who must rely on published information.  And the relationship between the underwriter and its customers implicitly involves a favorable recommendation of the issued security. 

 

Because the public relies on the integrity, independence and expertise of the underwriter, the underwriter's participation significantly enhances the marketability of the security.  And since the underwriter is unquestionably aware of the nature of the public's reliance on his participation in the sale of the issue, the mere fact that he has underwritten it is an implied representation that he has met the standards of his profession in his investigation of the issuer. (Emphasis supplied.)"

 On Aug. 17, 2009, the State of New York Attorney General brought an enforcement action against Charles Schwab in connection with the firm's sales of auction rate securities to its customers.  People of the State of New York by Andrew M. Cuomo, Attorney General of the State of New York against Charles Schwab & Co., Inc. (Aug. 17, 2009).  The markets for auction rate securities began to fail in August 2007 and experienced widespread failures in mid-February 2008.

 

These failures have prevented Charles Schwab customers who purchased these securities from selling them and accessing money that they invested based upon representations that the securities were highly liquid.

 

The New York Attorney General's complaint alleges that Charles Schwab engaged in misleading sales practices by describing auction rate securities to prospective investors as safe, liquid, short-term investments that were suitable for investors to use for their cash management purposes.  Complaint at paragraph 30.

 

The State of New York also alleged that Charles Schwab misrepresented or failed to disclose to investors the liquidity risks associated with auction rate securities. Id.  Charles Schwab has vigorously denied any wrongdoing in this case.

 

Although the Schwab YieldPlus Fund did not hold any auction rate securities in its portfolio, Charles Schwab's responses to the allegations made by the State of New York are highly relevant to the factual and legal issues being contested in the Schwab YieldPlus Fund cases.

 

Charles Schwab has posted on its website a letter dated July 24, 2009 to the New York Attorney General's Office from attorney Faith Gay of the law firm Quinn Emanuel, the New York law firm representing Charles Schwab in this matter.  The letter sets forth Charles Schwab's arguments regarding why the State of New York's expected enforcement action would be both unjust and unwarranted.

 

Charles Schwab's primary defense as set forth in its law firm's July 24, 2009 letter is the fact that because it was not an underwriter of the auction rate securities that it sold to its customers, it did not have access to the information about the serious difficulties that the auction rate securities markets began to experience in August 2007.  Charles Schwab asserts that it was, in fact, deceived by the underwriters of the ARS, as stated below in Faith Gay's letter dated July 24, 2009 to the New York Attorney General's Office:


Schwab And Its Customers Were  Deceived By The Underwriters/Lead Managers 


Conspicuously missing from the Attorney General's purported 5-day notice letter is the major role that the lead underwriters played in deceiving Schwab, withholding critical information regarding ARS from Schwab, and providing misleading information knowing that Schwab would rely on that information and pass it on to customers.  As underwriters and "lead managers" of the auctions for the ARS they underwrote and brokered, these firms had information regarding the auction market, and their own manipulation of the market, that was not known to or knowable by Schwab or Schwab's clients. . . .

 

With no role in the underwriting of ARS, Schwab relied on the lead underwriters for access to ARS and relied on information regarding ARS and the auction markets provided by these firms. . . .  Faith Gay/Quinn Emanuel Letter dated July 24, 2009 at p. 4.

The Shine-Vernon legal team in its representation of Schwab YieldPlus Fund investors has alleged that Charles Schwab did not live up to this standard when it acted as the sole underwriter of the Schwab YieldPlus Fund.  The Shine-Vernon Team is alleging on behalf of its clients that Charles Schwab knew or was reckless or negligent in not knowing the liquidity risks associated with asset-backed and mortgage-backed securities held by the Schwab YieldPlus Fund.  [See Law Commentary dated November 18, 2009 for a detailed discussion pertaining to these risks.]

 

The Shine-Vernon Team has alleged that Charles Schwab and its affiliates failed to disclose these risks to prospective investors in the fund.  The Shine-Vernon Team, which represents a number of Schwab YieldPlus Fund investors nationwide, is also alleging that Charles Schwab made a number of other misrepresentations and omissions of material fact in connection with its underwriting and marketing of the Schwab YieldPlus Fund to its customers.


These misrepresentations and omissions included:

 

  • The fact that the Schwab YieldPlus Fund was not an ultra short-term bond fund as stated in the fund's prospectuses [See Law Commentary dated Nov. 17, 2009.];
  • The implementation of investment strategies of maintaining minimal proportional cash equivalent balances while contemporaneously and significantly increasing the fund's concentration in higher yielding and illiquid asset-backed and mortgage-backed securities. These strategies were inconsistent with the Schwab YieldPlus Fund's stated investment objectives and level of risk which called for high current income with minimal changes in share price;
  • The overall level of safety of the Schwab YieldPlus Fund, in that, it was described and marketed to investors as an alternative to cash, and analogized to 1-year and 2-year certificates of deposit;
  • The true features of the fund, in that, Charles Schwab falsely classified it as "Portfolio Cash," the same category assigned to 1-year and 2-year certificates of deposit; and
  • The fund's lack of liquidity in July and August 2007 and at various times thereafter available to meet substantial redemptions in the fund.


The Charles Schwab response to the proposed (and later instituted) New York Attorney General's auction rate securities enforcement action acknowledges and highlights the crucial due diligence investigation duties that Charles Schwab, acting as the sole underwriter of the Schwab YieldPlus Fund, owed to prospective investors prior to marketing this fund to the public.


For information, contact:
- Thomas F. Shine, a former Securities and Exchange Commission Division of Enforcement attorney (Florida, 800-838-8320, www.thomasfshinelaw.com);
- Christopher T. Vernon, an investor rights attorney who represents investors throughout the United States (Florida, 239-649-5390, www.vernonhealy.com)
- Thomas D. Mauriello, an investor rights attorney who represents investors throughout the United States (California, 888-612-1961, www.maurlaw.com)
- Timothy J. Dennin, a former Securities and Exchange Commission Division of Enforcement attorney and former assistant district attorney (New York, 212-826-1500, www.denninlaw.com)

Tags:

Charles Schwab Knew Or Should Have Known About The Liquidity Risks Of Asset-Backed And Mortgage-Backed Securities And Did Not Disclose These Risks To Schwab YieldPlus Fund Investors.

By
Sara
on November 18, 2009 5:11 PM |
In June and July 2007, the forced liquidation of two Bear, Stearns & Co., Inc. hedge funds invested primarily in mortgage-backed securities bonds backed by pools of sub-prime mortgages, focused attention on the liquidity risks of securities that had assumed an inappropriately large role in the Schwab YieldPlus Fund.  These were risks that had previously been highlighted by bank and securities regulators during the 1990s.

As of July 31, 2007, the Schwab YieldPlus Fund was the largest ultrashort bond fund in its Morningstar category with the fund's total net assets having grown to approximately $13.4 billion.  

As of that date, the Schwab YieldPlus Fund's asset allocation consisted of asset-backed obligations (approximately 12 percent), collateralized mortgage obligations (CMOs) and other mortgage-backed securities (approximately 44 percent), and corporate bonds (roughly 43 percent of total net assets).  The fund contained less than 2 percent collectively in preferred stock, commercial paper and other obligations, U.S. Treasury obligations and short sales, swap agreements and futures contracts.

The Schwab YieldPlus Fund experienced net shareholder redemptions in August 2007 of almost $2.4 Billion (almost 18% of total net assets).  These redemptions, combined with the low cash equivalent balances that the fund was maintaining to boost its performance relative to its ultrashort bond fund category peer, forced the Schwab YieldPlus Fund portfolio managers to sell asset-backed obligations, mortgage-backed securities and corporate bonds into an illiquid market at distressed prices in order to generate cash.

The realized and unrealized losses that the Schwab YieldPlus Fund sustained on these August 2007 sales resulted in the fund's net asset value price (NAV) per share declining from $9.67 to $9.42 per share during the period from July 31 through Aug. 31, 2007.

Schwab YieldPlus Fund shareholders continued to redeem their shares over the next nine months.  This forced the fund's portfolio managers to continue to sell asset-backed obligations and mortgage-backed securities into an illiquid market at steadily mounting losses and corresponding declines in the NAV price of the fund.

By May 31, 2008, the Schwab YieldPlus Fund's NAV had declined in market value to $6.31 per share, and its total net assets had plummeted to $689 million, down 94.9 percent from the $13.4 billion in total net assets managed by the fund on July 31, 2007.  

The Shine-Vernon legal team, in its representation of Schwab YieldPlus Fund investors, has alleged that Charles Schwab failed to disclose to investors the liquidity risks associated with asset-backed obligations and mortgage-backed securities.  Banks and broker-dealers not only had been previously alerted to these risks by bank and securities regulators in the 1990s, but the risks were also routinely described in the prospectuses for the individual bonds held by the Schwab YieldPlus Fund portfolio.


Bank Regulator Guidance - 1992

The Office of the Comptroller of the Currency (the OCC) regulates and supervises national banks.  On Jan. 10, 1992, the OCC published and distributed to banks revised Banking Circular 228 (BC-228), which is an official policy statement of the OCC.

Pursuant to its issuance of BC-228, the OCC made it clear that mortgage derivative products are "complex" instruments, requiring "a high degree of technical expertise . . . to understand how their prices and cash flows may behave in various interest rate and prepayment environments."

The OCC further advised banks that, since the secondary market for some of the mortgage derivative products was relatively thin, they might be difficult to liquidate should the need arise. OCC Banking Circular 228 at pp. 58-59, 61 (Jan. 10, 1992).


Self-Regulatory Organization Securities Regulator Guidance - 1993 and 2003

The Financial Industry Regulatory Authority (FINRA, which was formerly known as the National Association of Securities Dealers, Inc. or NASD) is the broker-dealer self-regulatory organization of which brokerage firms such as Charles Schwab are members. FINRA frequently provides legal and regulatory guidance to its broker-dealer member firms through Notices To Members (NTMs) that it promulgates and disseminates.

In October 1993, the NASD issued NASD NTM 93-73 "Members Obligations to Customers When Selling Collateralized Mortgage Obligations" (CMOs) which reminded member brokerage firms of their obligations when recommending CMOs to their customers.  The NASD in this notice warned brokerage firms about the liquidity risks associated with CMOs as follows:


Condition of the Secondary Market/Liquidity

While there is a sizeable secondary market for CMOs generally, there is less of a market for the more risky and complex tranches.  CMOs are less uniform than traditional mortgage-backed securities and more expensive to trade.  It is also harder to obtain current pricing information.  Matching up buyers and sellers is often difficult, especially for the more esoteric tranches . . .  In addition, members, should clearly inform investors of extra costs or commissions associated with CMO transactions.


In Nov. 2003, the NASD issued NASD NTM 03-71 "Non-Conventional Investments," which grouped asset-backed securities with two other products and described them as "non-conventional investments" or NCIs.  NASD NTM 03-71 indicated that these products had "complex terms and features that are not easily understood."  It warned its members that "[t]hese products also tend to have less market liquidity, less transparency as to their pricing and value and may entail significant credit risks that are difficult to understand and assess."


SEC Enforcement Action - 1998, 2000 and 2003

On July 28, 1998, the SEC brought an administrative proceeding enforcement action against Piper Capital Management (PCM), an investment adviser, and Worth Bruntjen (Bruntjen), its portfolio manager.  The SEC alleged that the defendants committed fraud by making false and misleading statements to investors regarding the risks associated with investing in the Piper Jaffray Institutional Government Income Portfolio fixed income mutual fund.  In the Matter of Piper Capital Management et al., Admin. Proc. File No. 3-9657 (July 28, 1998).  The fund had a stated investment objective of "a high level of current income consistent with the preservation of capital."

The SEC alleged that, despite the fund's conservative investment objective, the fund was in fact a high risk investment as a result of PCM's and Bruntjen's investment of the fund's assets in interest rate-sensitive collateralized mortgage obligation derivatives.

The Initial Administrative Decision of the SEC Administrative Law Judge in the Piper Capital Management case was published on Nov. 30, 2000.  The administrative law judge found liability on the part of Piper Capital Management and various individuals associated with the firm. The administrative law judge's summary of the CMO market from 1991 through early 1994 is revealing:


3.  Financial Market Climate and Circumstances

Interest rates affecting the CMO market declined from late 1991 through early 1994.  Although the decline was steady throughout the period, it produced little volatility in the market. . . .  Early in 1994, however, the Federal Reserve Board initiated a series of interest rate increases.  These increases had a negative impact on CMO values.  CMO securities and the funds holding them suffered significant losses.

The losses caused concomitant sell-offs, depressing values even further as CMO securities flooded the market.  The situation turned critical when Askin Capital Management, Inc. (Askin), a large hedge fund manager, was unable to satisfy broker-dealer margin calls beginning on March 30, 1994.  As a consequence, broker-dealers liquidated several hundred million dollars in CMOs from Askin's funds, precipitating extreme price volatility and what generally is regarded as a "crash" in the CMO securities market.


The SEC affirmed the SEC Administrative Law Judge's Piper Capital Management decision on Aug. 26, 2003.  56 S.E.C. Reports 1033 (Aug. 26, 2003).  The Commission also noted the role that CMOs played in the performance of the Piper Jaffray Institutional Government Income Portfolio and commented on CMO market conditions in 1994.


Following the Fund's increased investment in CMOs, its returns significantly increased and it received increased publicity.  This in turn attracted a large influx of new investor money.  Between January 1992 and September 1993, the Fund's net assets increased by more than $500 million and the Fund broke multiple sales records.
    
However, as described in Section IV.B. below, in 1994, the CMO market collapsed, and the Fund suffered significant losses. . . .  Id. at 1045.



The Wall Street Journal Article - 1994

The turmoil that the CMO market was experiencing in April 1994 was contemporaneously chronicled by The Wall Street Journal.  On April 20, 2004, The Wall Street Journal published a story titled "Mortgage Derivatives Claim Victims Big and Small," by Laura Jereski.

Ms. Jereski reported that rising interest rates had caused the mortgage-backed securities market to unravel unpredictably across the board because Wall Street dealers were becoming "reluctant to make markets in these esoteric securities because they're afraid of additional losses."

Jereski also reported that the reluctance of dealers to quote prices for many CMOs - out of fear that investors would demand to trade at those prices - had caused bid-offer spreads on these securities to widen to 10 points, or $100 on a bond with a $1,000 face value.


Asset-Backed Obligation and Mortgage-Backed Securities Prospectuses

The disclosures by issuers of mortgage-backed and asset-backed securities regarding the liquidity risks of these types of securities are fairly standard.  Two examples of the typical liquidity disclosures contained in prospectuses of mortgage-backed and asset-backed securities owned by the Schwab YieldPlus Fund on July 31, 2007 are as follows:

Countrywide Home Loan, Series 2006-20, Class 1A36 Prospectus (Mortgage-Backed Security)


Secondary Market For
The Securities May Not Exist 
 
The related prospectus supplement for each series will specify the classes in which the underwriter intends to make a secondary market, but no underwriter will have any obligation to do so. We can give no assurance that a secondary market for the securities will develop or, if it develops, that it will continue. Consequently, you may not be able to sell your securities readily or at prices that will enable you to realize your desired yield.  The market values of the securities are likely to fluctuate. Fluctuations may be significant and could result in significant losses to you.

The secondary markets for mortgage backed securities have experienced periods of illiquidity and can be expected to do so in the future. Illiquidity can have a severely adverse effect on the prices of securities that are especially sensitive to prepayment credit or interest rate risk, or that have been structured to meet the investment requirements of limited categories of investors.  (Emphasis supplied.) Prospectus at p. 10.


HFC Home Equity Loan Trust Series 2006-4 Prospectus (Asset-Backed Obligation)


Limited Liquidity may result in
delays in liquidations or lower returns. 
         
There will be no market for the securities of any series prior to its issuance, and there can be no assurance that a secondary market will develop, or if one does develop, that it will provide holders with liquidity of investment or that any market will continue for the life of the securities.  One or more underwriters, as specified in the prospectus supplement, may expect to make a secondary market in the securities, but they have no obligation do so.  Absent a secondary market for the securities you may experience a delay if you choose to sell your securities and the price you receive may be less than that which is offered for a comparable liquid security.  (Emphasis supplied.) Prospectus at p. 1.


The SEC on numerous occasions has stated that, prior to making a recommendation to a customer, a broker-dealer and/or registered representative must: (1) have an adequate and reasonable basis for the recommendation based upon a reasonable investigation of that security; and (2) disclose to the customer material facts about the security which are known and are readily ascertainable, including adverse facts of which the broker-dealer or registered representative should be aware.

The U.S. Supreme Court has held that under the federal securities laws, an omitted fact is deemed to be material if there is a substantial likelihood that, taking into account all of the circumstances, the omitted fact would have assumed actual significance in the deliberations of a reasonable shareholder.  Basic, Inc. v. Levinson, 485 U.S. 224 (1988).

State law definitions of what a material fact is can differ slightly from the U.S. Supreme Court's definition.  For example, a material fact under Florida state law is one of such importance that, but for the nondisclosure or misrepresentation, the complaining party would not have entered into the transaction.

Bank and securities regulators have been warning banks and broker-dealers since at least 1992 about the liquidity risks associated with mortgage-backed and asset-backed securities.

The demise of the Schwab YieldPlus Fund is directly related to the portfolio managers' decision to maintain minimal cash equivalent securities available to satisfy shareholder redemptions, the fund's overconcentration of its assets in potentially illiquid asset-backed and mortgage-backed securities and the fund's distressed sales of these illiquid securities when substantial shareholder redemptions actually occurred.

Neither the Schwab YieldPlus Fund prospectuses nor any of Charles Schwab's other communications with the public pertaining to the fund made any sort of equivalent disclosures regarding the liquidity risks of asset-backed and mortgage-backed securities. Neither did Schwab disclose the fund's low levels of cash available to address the possibility of significant shareholder redemptions.

For information, contact:
- Thomas F. Shine, a former Securities and Exchange Commission Division of Enforcement attorney (Florida, 800-838-8320, www.thomasfshinelaw.com);
- Christopher T. Vernon, an investor rights attorney who represents investors throughout the United States (Florida, 239-649-5390, www.vernonhealy.com)
- Thomas D. Mauriello, an investor rights attorney who represents investors throughout the United States (California, 888-612-1961, www.maurlaw.com)
- Timothy J. Dennin, a former Securities and Exchange Commission Division of Enforcement attorney and former assistant district attorney (New York, 212-826-1500, www.denninlaw.com)

Tags:

Schwab YieldPlus Fund Was NOT An Ultra Short-Term Bond Fund

By
Sara
on November 17, 2009 4:41 PM |
When reporting bond maturity dates to the public and Securities and Exchange Commission for investments held in the Schwab YieldPlus Fund, the fund managers chose a different method than their peers.

Although Schwab disclosed this peculiar manner for reporting maturity dates for certain types of  bonds in the Schwab YieldPlus Fund's portfolio, Schwab's diversion from the normal manner in which bond funds report maturity dates understated maturity dates for some of the individual investments held in the Schwab YieldPlus Fund's portfolio by many years in some cases.

Take for example the Schwab YieldPlus Fund's substantial portfolio holding of an asset-backed obligation called the SLM Student Loan Trust Series 2005-5, Class A2: Schwab reported on its May 31, 2007 Form NQ filing with the SEC that this investment had a "maturity date" of Oct. 25, 2007.  However, this contradicts SEC filings by the SLM Student Loan Trusts and understates the actual legal stated maturity date for this investment by 14 years. 

SLM Student Loan Trusts prospectus supplements filed with the SEC disclose that the actual maturity date of the SLM Student Loan Trust Series 2005-5, Class A2 is Oct. 25, 2021.       

Schwab Investments' practice has been to report the next interest rate reset date rather than the actual legal stated final maturity date of the security for floating and variable rate obligations. Schwab Investments discloses this practice on the first page of the descriptions of the individual securities held in each of its bond fund portfolios.

This practice lured investors into purchasing a much riskier bond mutual fund than advertised. Calculations by the Shine Vernon legal team show that Schwab's YieldPlus Fund was not an "ultra short-term" bond fund.      
 
Understanding Bond Maturities

Bond investors generally understand that a AAA rated corporate or municipal bond that will mature in six months is a much safer investment than a AAA rated bond that will mature in five years, both in terms of default risk and in terms of interest rate risk/price sensitivity.  With respect to default risk, this understanding is based upon the much lower probability that the issuer of a six month bond might default on its obligation to pay investors the par value of the bond prior to the maturity date.

As the term to maturity of bonds lengthen, investors typically demand higher rates of return as compensation for the increased probability or risk that the issuer of the bonds might encounter financial difficulties prior to the bond's maturity date and be unable to pay back the principal owed to bondholders.

With respect to interest rate risk, shorter term bonds have lower interest rate risk than longer term bonds because short-term bondholders receive their bond principal back earlier than long-term bondholders.  Short-term bondholders can then reinvest the par value of their recently matured bonds into new or outstanding bonds that pay the higher prevailing market interest rates.

The Schwab YieldPlus Fund in its initial public offering (IPO) prospectus dated July 21, 1999 represented that the fund would be investing in investment grade (high and certain medium quality) bonds.  Investment grade bonds have Standard & Poor's ratings that include AAA (highest quality/safest), AA, A and BBB.  The Schwab YieldPlus Fund IPO prospectus' emphasis on safety is reflected in the following excerpt:


. . .  To help maintain a very high degree of share price stability and preserve investors' capital, the fund seeks to keep the average effective maturity of its overall portfolio at one year or less. . . .  (Emphasis supplied.)  Schwab YieldPlus Fund Prospectus Dated July 21, 1999 at p. 4.


Schwab Investments, the issuer of the Schwab YieldPlus Fund, revises and disseminates an updated prospectus for the Schwab YieldPlus Fund at least annually.  The Schwab YieldPlus Fund prospectus dated Nov. 15, 2000 subtly changed the above quoted language as follows:


. . .  To help maintain a very high degree of share price stability and preserve investors' capital, the fund seeks to keep the average effective duration of its overall portfolio at one year or less. . . .  (Emphasis supplied.)  Schwab YieldPlus Fund Prospectus Dated Nov. 15, 2000 at p. 4.


Duration is another measure of interest rate risk, that is, how sensitive a bond's market value is to a  1 percent change in market interest rates.  For example, if a bond has a duration of 2.5, and interest rates change by 1 percent, this bond could be expected to decrease in value by 2.5 percent in the case of an interest rate increase or increase in value by the same amount in the event of an interest rate decrease.

As will be discussed below, a floating or variable rate bond which periodically adjusts its coupon interest payment to reflect current prevailing market interest rates can simultaneously have a low duration (low interest rate volatility) and a long-term maturity.

Calling Schwab YieldPlus an "Ultra Short-term Bond Fund"

Beginning in November 2004, Schwab YieldPlus prospectuses represented that the fund was both an "ultra short-term bond fund" and a fund that had "an average duration of one year or less."  Simple calculations based upon Schwab Investments' descriptions contained in its quarterly, semiannual and annual reports of the individual bonds held by the Schwab YieldPlus Fund indicate that the fund was not really an ultra short-term bond fund, as represented by Schwab Investments and Charles Schwab, but an intermediate to long-term bond fund.

For example,  the Schwab Investments Annual Report for the period ending August 31, 2007 reported to the SEC and the public that the weighted average maturity of the bond fund's portfolio was six months as of that date.  The Shine-Vernon legal team's experts have analyzed the Schwab YieldPlus Fund portfolio holdings listed in the public SEC Annual Report filed by Schwab Investments and estimate that the fund's weighted average maturity was more than six years as of the same date.

This "ultra short-term bond fund" misrepresentation regarding the weighted average maturity of the fund's bond portfolio combined with additional specific misrepresentations[GVE1] pertaining to the actual weighted average maturity of the fund at various points in time (See weighted average maturity calculations for Feb. 28, 2007 and Aug. 31, 2007 below.) accomplished the following for Schwab's benefit.  The misrepresentations:
  • lured investors into purchasing a product that was much riskier than advertised and;
  • encouraged existing Schwab YieldPlus Fund shareholders in 2007 and 2008 to hold their shares based upon their understanding that the net asset value price per share of the fund would imminently recover when the highly rated bonds in the portfolio (AA or high credit quality) matured at par value within the next six months.

Schwab Investments' Reporting Method Obfuscates Investors' Accurate Evaluations

Schwab Investments' manner of reporting the maturity dates of the floating and variable rate securities in the Schwab YieldPlus Fund portfolio prevented investors from making an accurate evaluation of the weighted average maturity of the fund's portfolio.

Schwab Investments began filing semiannual and annual reports for the Schwab YieldPlus Fund in 2000.  From the filing of its initial semiannual report for the period ending Feb. 29, 2000 through the present, Schwab Investments' practice has been to report the next interest rate reset date rather than the actual legal stated final maturity date of the security for floating and variable rate obligations.  Schwab Investments discloses this practice on the first page of the descriptions of the individual securities held in each of its bond fund portfolios.

However, this manner of reporting gives the term to maturity of the individual security positions and the weighted average term to maturity of the portfolio as a whole the appearance of being much shorter than they actually are.  Schwab Investments' practice of not reporting stated final maturity dates for floating and variable rate securities also makes it impossible to calculate a true weighted average maturity for the portfolio.  Schwab Investments' practice was contrary to the manner in which other ultrashort bond funds reported the maturity dates of the floating and variable rate bonds in their portfolios (i.e., actual maturity dates were reported rather than interest rate reset dates).

The following example illustrates the disparity between the actual maturity dates of the variable rate securities owned by the Schwab YieldPlus Fund and the manner in which Schwab Investments reported the maturity dates to the public.  Schwab Investments reported in a Form NQ that, as of May 31, 2007, the Schwab YieldPlus Fund held a substantial position in the following asset-backed obligation issued by the SLM Student Loan Trust:

Schwab YieldPlus Fund
Portfolio Holdings (Unaudited) continued

Security                                     Face Amount                Value           
Rate, Maturity Date                    ($ x 1,000)                ($ x 1,000)

SLM Student Loan Trust
Series 2005-5 Class A2
 5.35%, 07/25/07 (a)(b)(d)             157,250                    156,677     

Although the interest rate reset date of July 25, 2007 (65  days or less than 3  months) is  listed as the maturity date for this  bond in the Schwab Investments Form NQ, the SLM Student Loan Trust prospectus supplement filed with the SEC discloses that the actual maturity date of the SLM Student Loan Trust Series 2005-5, Class A2 asset-backed obligation is October 25, 2021.

(See SEC filing) http://www.sec.gov/Archives/edgar/data/1330979/000119312505134330/d424b5.htm)

This  maturity date is  fourteen years  more than the interest rate reset date listed as the maturity date by Schwab Investments in the Form NQ.

The Shine-Vernon legal team's expert witnesses have calculated the weighted average term to maturity of the Schwab YieldPlus Fund portfolio for the periods ending Feb. 28, 2007 (Semiannual Report), May 31, 2007 (Form NQ) and Aug. 31, 2007 (Annual Report).  We have assumed that, for the purposes of making these calculations, the interest rate reset dates for the floating and variable rate obligations are the actual final maturity dates (i.e., Schwab Investments' custom and practice).  The Schwab Investments calculations and the Shine-Vernon team calculations of Weighted Average Maturity are as follows:

Schwab Inv. Reported              Shine-Vernon Team Calculation
                                         Weighted Aver. Mat.        Weighted Aver. Mat.

Feb. 28, 2007                           2.9 years                           6.96 years

May 31, 2007                         Not Reported                        6.46 years

Aug. 31, 2007                          0.5 years                            6.17 years

The Shine-Vernon Team experts' calculations of the Schwab YieldPlus Fund's weighted average maturities, which most likely significantly understate the true weighted average maturities of the fund, indicate that the Schwab YieldPlus Fund was actually an intermediate and possibly a long-term bond fund with respect to term of maturity.  The Schwab YieldPlus Fund may have been an ultrashort duration bond fund only in terms of interest rate volatility, due to the portfolio's high proportional asset concentration in floating and variable rate securities.

The Shine-Vernon Team's review of annual, semiannual and quarterly reports filed during 2007 by more than ten other ultrashort bond funds reveals that, unlike Schwab Investments, these funds, without exception, report the actual final term to maturity dates of all floating or variable rate securities, rather than the interest rate reset dates.

As described above, the Schwab YieldPlus Fund's investment strategies contained in the fund's prospectuses indicate that the fund changed the manner in which it would minimize price fluctuations associated with interest rate risk from maintaining a portfolio with an ultra short-term maturity to maintaining a portfolio with an ultrashort duration.  This subtle language change points to a significant shift in the investment strategies of Schwab YieldPlus Fund portfolio managers to increase the fund's concentration in longer-term floating and variable rate securities that had low effective durations due to the periodic interest rate reset feature of the securities (i.e., low interest rate volatility/risk).

These floating or variable rate securities had long-term final maturity dates, which means that they would need to be held much longer than ultra short-term securities in order for the Schwab YieldPlus Fund and its shareholders to receive the returns of the face or par value of the securities.

These longer-term floating and variable rate securities, which Schwab Investments represented as being of high credit quality (AA or low default risk), would mature at face value assuming that there were no defaults by the issuers.  Although this new strategy may have been effective for limiting interest rate risk, it was ill-suited to limiting the fund's liquidity risk.  For example, this strategy left the fund without sufficient cash equivalents available to satisfy shareholder redemptions.

Indeed, it had disastrous effects in 2007 and 2008 when the fund's portfolio managers were forced to sell these longer term and illiquid securities at distressed prices prior to their maturity dates in order to raise cash to meet ever-escalating cumulative shareholder redemptions.

Nonetheless, in the face of this situation, Schwab YieldPlus Fund lead portfolio manager Kimon Daifotis and Charles Schwab in their communications to Schwab YieldPlus Fund shareholders repeatedly represented during the last four months of 2007 and in early 2008 that substantial portions of the Schwab YieldPlus Fund's losses were "unrealized."  These representations led shareholders to believe that:
  • The fund would recover all or a significant portion of these unrealized losses as long as the fund was able to hold the bonds that it currently owned for six months or a year; and
  • That the net asset value price per share of the Schwab YieldPlus Fund would recover within the next six months to a year as the bonds in the portfolio matured at par value.

Such statements were false and misleading.  The actual weighted average maturity of the fund was far in excess of the six months that Schwab Investments reported to the SEC and to the public in the fund's Annual Report for the period ending Aug. 31, 2007.  The deception of shareholders through these sorts of communications is even more egregious given that Charles Schwab and Mr. Daifotis contemporaneously knew that the fund was experiencing steady and substantial net redemptions, which made it almost certain that the fund would not be able to hold a significant portion of the long-term bonds in the portfolio until they matured.

For information, contact:
- Thomas F. Shine, a former Securities and Exchange Commission Division of Enforcement attorney (Florida, 800-838-8320, www.thomasfshinelaw.com);
- Christopher T. Vernon, an investor rights attorney who represents investors throughout the United States (Florida, 239-649-5390, www.vernonhealy.com)
- Thomas D. Mauriello, an investor rights attorney who represents investors throughout the United States (California, 888-612-1961, www.maurlaw.com)
- Timothy J. Dennin, a former Securities and Exchange Commission Division of Enforcement attorney and former assistant district attorney (New York, 212-826-1500, www.denninlaw.com);

Tags:

Shine-Vernon team files new fraud claims against Charles Schwab over YieldPlus Fund misconduct

By
Sara
on October 19, 2009 3:07 PM |
Melbourne, Florida -- Charles Schwab & Co. and its former high-profile fund manager engaged in deception and fraudulent conduct when they misrepresented the Schwab YieldPlus Fund as safe haven for investors while loading the fund with high concentrations of risky mortgage- and asset-backed securities that exposed fund investors to steep losses of their principal, according to claims filed today by the Shine Vernon legal team on behalf of investors with more than $400,000 in losses.

The Shine-Vernon team, which is headed by former SEC enforcement attorney Thomas Shine and longtime investor rights' attorney Chris Vernon and includes two other former SEC attorneys, has filed arbitration claims on behalf of individual investors with Schwab YieldPlus Fund (SWYPX, SWYSX, SCHW) losses totaling $1.7 million this month. The team has filed claims on behalf of Schwab YieldPlus investors with losses totaling almost $3 million since mid July.

Many Schwab YieldPlus investors represented by the Shine-Vernon team are retirees and baby boomers who've suffered significant losses of principal. In the last month, the Shine-Vernon team has filed claims on behalf of investors including a park ranger, ocean engineer, insurance broker, retired banking industry professional, manufacturing consultant, real estate developer, boat broker, journalist, judge, and two real estate professionals.

Charles Schwab acknowledged today that it has received a Wells Notice from the SEC, advising the company that the SEC's enforcement staff intends to recommend that the Commission institute legal action against Schwab related to the YieldPlus Fund.

Charles Schwab compared its Schwab YieldPlus Fund to the safety of 1 and 2-year certificates of deposit and described it as "portfolio cash" on its website, but actually the bond mutual fund managers loaded the fund with high concentrations of risky mortgage- and asset-backed securities that exposed fund investors to the danger of substantial losses of their principal, the claims assert.

"The SEC enforcement staff's Wells Notice is not really a surprise. The breadth of misconduct we've uncovered as part of our investigation is profoundly disturbing," Shine said.

According to the arbitration claims filed today with the Financial Industry Regulatory Authority on behalf of individual investors:  

-- Schwab embarked on a self-dealing "damage control" marketing campaign to discourage shareholder redemptions of Schwab YieldPlus by Charles Schwab retail clients, quietly selling almost 3.0 million Schwab YieldPlus Fund shares from other Schwab proprietary mutual funds during the period January 31, 2008 to April 1, 2008, while indicating in marketing materials, newsletters, talking points, and other investor communications that unwitting Schwab retail clients should hold their shares;

-- In SEC filings and direct communications with shareholders and prospective investors, Schwab misrepresented the Schwab YieldPlus Fund as an "ultra short-term" bond fund.  In reality, the fund was heavily weighted with floating and variable rate bonds with long-term maturities, which gave the fund a weighted average maturity equivalent to an intermediate term bond fund.  During the second half of 2007 and in 2008, when the fund was declining in value, these misrepresentations created the false illusion that if investors held on to their positions for the next six months to a year, the bonds held in the fund's portfolio would mature at face or par value and the fund and its shareholders would recover most of their unrealized losses.

-- Schwab's senior management changed the Schwab YieldPlus Fund's investment policy in September 2006 to allow for a higher concentration in riskier mortgage-backed securities and asset-backed securities, without obtaining shareholder approval or clearly disclosing this major shift to investors;    


-- Schwab ignored the warnings of securities and banking regulators about the risky nature of mortgage-backed securities and collateralized mortgage obligations, including warnings to refrain from deceptive advertising of such securities including comparisons to certificates of deposits;

-- Schwab's management failed to adequately disclose that investors had withdrawn $2.8 billion from the YieldPlus Fund in August 2007. Full and explicit disclosure didn't come until November 30, 2007 -- by which time the Fund's net assets had dropped to $8 billion, down from $13.5 billion as of July 31, 2007;


-- Unlike its peers in the Morningstar ultra short bond fund category, the Schwab YieldPlus Fund failed to maintain adequate cash on hand to meet investor redemptions.  Schwab YieldPlus Fund had only 6.5 percent of its portfolio in cash, while its peers in the ultra short-term bond fund category averaged 27 percent of their positions in cash.  As more and more investors sought to sell their shares, Schwab had to sell illiquid securities held in the portfolio at distressed prices;

The Schwab YieldPlus Fund saw a catastrophic freefall, as net assets plunged from a high of $13.5 billion in July 2007 to just $679 million on May 31, 2008.   Schwab reports that as of May 31, 2009, the YieldPlus Fund's assets were at $161.72 million.

California investor rights attorney Thomas D. Mauriello is also part of the Shine-Vernon legal team and has actively filed numerous arbitration cases in California on behalf of individual YieldPlus investors.  

"Investors in YieldPlus by definition were seeking a conservative investment," Mauriello said.  "All of my clients have one thing in common, and that is utter shock and disbelief at having suffered huge losses in what they reasonably believed was a safe alternative to cash."

The Shine-Vernon legal team has interviewed more than 100 investors as part of its Schwab YieldPlus investigation and filed arbitration claims on behalf of investors in Florida, California, Texas, New York, Missouri, Minnesota, Illinois, Alabama and Hawaii.

"The Schwab YieldPlus Fund is a sad example of how the greed on Wall Street and the mortgage-backed securities crisis combined to devastate average investors," Vernon said.

URL: http://www.protectinginvestors.com/2009/10/shine-vernon-team-files-new-fraud-claims-today-against-charles-schwab-over-yieldplus-fund-misconduct.html

URL:http://www.google.com/url?sa=X&q=http://www.reuters.com/article/pressRelease/idUS212243%2B15-Oct-2009%2BGNW20091015&ct=ga&cd=ZjsdFQOXp2Q&usg=AFQjCNGJF5Yxun_WbLke9Jp8Pm5QaBmARQ

For information, contact:
- Thomas F. Shine, a former Securities and Exchange Commission Division of Enforcement attorney (Florida, 800-838-8320, www.thomasfshinelaw.com);
- Christopher T. Vernon, an investor rights attorney who represents investors throughout the United States (Florida, 239-649-5390, www.vernonhealy.com)
- Thomas D. Mauriello, an investor rights attorney who represents investors throughout the United States (California, 888-612-1961, www.maurlaw.com)
- Timothy J. Dennin, a former Securities and Exchange Commission Division of Enforcement attorney and former assistant district attorney (New York, 212-826-1500, www.denninlaw.com);

Tags:

Shine-Vernon legal team California co-counsel Thomas D. Mauriello files three new Schwab YieldPlus arbitration claims, seeking recovery of over a half million dollars in losses

By
Sara
on October 8, 2009 3:05 PM |
Thomas D. Mauriello, California co-counsel with the Shine-Vernon legal team, recently filed three new arbitration claims on behalf of California investors who collectively lost more than $500,000 in the Schwab YieldPlus Fund (SWYPX, SWYSX, SCHW) and the Schwab California Tax Free YieldPlus Fund (SWYCX).

Schwab marketed its Schwab YieldPlus Fund and Schwab California Tax Free YieldPlus Fund to retirees and other conservative investors as safe ultra short-term bond funds and alternatives to cash.  However, the Funds' managers over-concentrated the Funds with risky mortgage- and asset-backed securities in the case of the YieldPlus Fund and, in addition, with auction rate securities in the case of the California Tax Free YieldPlus Fund, exposing the Funds to huge undisclosed liquidity risk and other risks and ultimately causing investors steep losses of their principal, the new claims assert.

"With each new claim we investigate and file, we are expanding our understanding of the scope of Schwab's recklessness and misrepresentations with respect to these particular funds," Mr. Mauriello stated.  "We are putting a great deal of effort into these investigations and the resulting claims to obtain recovery for the individual investor."  

The Shine-Vernon legal team, headed by former SEC enforcement attorney Thomas Shine and longtime investor rights' attorney Chris Vernon, has interviewed more than 100 investors as part of its Schwab YieldPlus investigation.  The team consists of six law firms throughout the United States.  The team has filed arbitration claims on behalf of investors in Florida, California, Texas, New York, Missouri, Minnesota, Illinois and Hawaii.  While the attorneys on the team have high-level, nationwide experience in securities arbitrations, the firms are small enough to offer personalized attention and care to each client throughout the arbitration process.

These latest claims were filed on behalf of baby boomers and retirees, including an engineer, a journalist, a judge, and two real estate professionals.  Two of the claims will be heard in San Francisco while the third will be heard in San Diego.  These claims come on the heels of $1 million in investor claims filed by the Shine-Vernon legal team in July.

The new claims assert that the reckless actions of the fund managers of the Schwab YieldPlus Fund and Schwab California Tax Free YieldPlus Fund compromised the Funds' liquidity and exposed investors to substantial risk of losses, while Schwab was marketing these funds as a safe alternative to cash.  This set the stage for the catastrophic free-fall of the Schwab YieldPlus Fund, as net assets plunged from a high of $13.5 billion in July 2007 to just $679 million on May 31, 2008.   Schwab reports that as of May 31, 2009, the YieldPlus Fund's assets were at $161.72 million.  The Schwab California Tax-Free YieldPlus Fund experienced a similar decline in total managed assets, decreasing from $1.201 billion as of July 31, 2007 to $156.68 million (down 86.96%) on August 31, 2008.
The claims include the following allegations:

-- In SEC filings and direct communications with shareholders and prospective investors, Schwab misrepresented the Schwab YieldPlus Fund as an ultra short-term bond fund.  In reality, the fund was heavily weighted with floating and variable rate bonds with long-term maturities, which gave the fund a weighted average maturity equivalent to an intermediate term bond fund.  During the second half of 2007 and in 2008, when the fund was declining in value, these misrepresentations created the false illusion that if investors held on to their positions for the next six months to a year, the bonds held in the fund's portfolio would mature at face or par value and the fund and its shareholders would recover most of their unrealized losses.

-- Unlike its peers in the Morningstar ultra short bond fund category, the Schwab YieldPlus Fund failed to maintain adequate cash on hand to meet investor redemptions.  Schwab YieldPlus Fund had only 6.5 percent of its portfolio in cash, while its peers in the ultra short-term bond fund category averaged 27 percent of their positions in cash.  As more and more investors sought to sell their shares, Schwab had to sell illiquid securities held in the portfolio at distressed prices;

-- Schwab's senior management changed the Schwab YieldPlus Fund's investment policy in September 2006 to allow for a higher concentration in riskier mortgage-backed securities and asset-backed securities, without obtaining shareholder approval or clearly disclosing this major shift to investors;    

-- Schwab's management failed to adequately disclose that investors had withdrawn $2.8 billion from the YieldPlus Fund in August 2007. Full and explicit disclosure didn't come until November 30, 2007 -- by which time the Fund's net assets had dropped to $8 billion, down from $13.5 billion as of July 31, 2007;

-- Schwab ignored the warnings of securities and banking regulators about the risky nature of mortgage-backed securities and collateralized mortgage obligations, including warnings to refrain from deceptive advertising of such securities including comparisons to certificates of deposits;

-- Schwab embarked on a self-dealing marketing campaign to avert redemptions of Schwab YieldPlus by Charles Schwab retail clients, quietly selling 2.9 million Schwab YieldPlus Fund shares from other Schwab proprietary mutual funds during the period January 31, 2008 to April 1, 2008, while indicating in marketing materials, newsletters, talking points, and other investor communications that unwitting Schwab retail clients should hold their shares.

URL:

For information, contact:
- Thomas F. Shine, a former Securities and Exchange Commission Division of Enforcement attorney (Florida, 800-838-8320, www.thomasfshinelaw.com)

- Christopher T. Vernon, an investor rights attorney who represents investors throughout the United States (Florida, 239-649-5390, www.vernonhealy.com)
 
- Thomas D. Mauriello, an investor rights attorney who represents investors throughout the United States (California, 888-612-1961, www.maurlaw.com)

- Timothy J. Dennin, a former Securities and Exchange Commission Division of Enforcement attorney and former assistant district attorney (New York, 212-826-1500, www.denninlaw.com)

 


 

Tags:

Shine-Vernon legal team files $1 million in claims on behalf of Florida Schwab YieldPlus investors on July 16, 2009

By
Sara
on July 22, 2009 3:52 PM |

JULY 16, 2009

Melbourne, Florida -- The Shine-Vernon legal team filed claims today on behalf of three Florida investors with principal losses totaling more than $1 million asserting that Charles Schwab & Co. and its former high-profile fund manager committed fraud when they deceptively marketed the Schwab YieldPlus Fund as a safe cash alternative.      

Schwab marketed its Schwab YieldPlus Fund (SWYPX, SWYSX) to investors as a safe, ultra short-term bond fund, but actually the bond mutual fund managers loaded the fund with high concentrations of risky mortgage- and asset-backed securities that exposed fund investors to the danger of substantial losses of their principal, the claims assert.

The Shine-Vernon legal team, headed by former SEC enforcement attorney Thomas Shine and longtime investor rights' attorney Chris Vernon, has interviewed more than 100 investors as part of its Schwab YieldPlus investigation and filed arbitration claims on behalf of investors in Florida, California, Texas, New York, Missouri, Minnesota, Illinois and Hawaii.

The three claims filed today are on behalf of three Florida investors, two of whom are in their 70s, with the third in his early 60s and nearing retirement age.

Many Schwab YieldPlus investors are conservative investors and retirees who've suffered steep losses of principal even though Charles Schwab compared its Schwab YieldPlus Fund to the safety of 1 and 2-year certificates of deposit and described it as "portfolio cash" on its website.

The claims filed today assert that the Schwab YieldPlus Fund managers' reckless actions and negligence set the stage for the catastrophic freefall of Schwab YieldPlus in which the bond mutual fund saw net assets plunge from a high of $13.5 billion on the eve of the subprime credit crisis in July 2007 to $507 million as of May 31, 2008. Schwab reports that as of May 31, 2009, the YieldPlus Fund's current assets were at $161.72 million.

The claims filed today include the following allegations:

-- This risky investment composition of the Schwab YieldPlus Fund by fund managers compromised the fund's liquidity 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. As of July 31, 2007, the Schwab YieldPlus fund held an astonishing 56 percent of its assets in risky mortgage-backed securities and asset-backed obligations (38 percent of all assets held in collateralized mortgage obligations) at a time when it was holding itself out as a safe haven for conservative investors and retirees, the claims assert;

-- Schwab's management opened the door to the fund's high concentration of risky mortgage and asset-backed securities by unilaterally determining that the mortgage industry didn't constitute a single industry for purposes of analyzing diversification of risks in the portfolio, the claims assert;   

--  On the eve of the credit crisis in May 2007, the Schwab YieldPlus Fund had 6.5 percent of its holdings in cash, compared to its peers in the Ultrashort Bond Fund category who held, on average, 26.8 percent of their positions in cash. The meager cash holdings of the Schwab YieldPlus Fund set the stage for the fund's meltdown when investors sought approximately $2.8 billion in redemptions during August 2007 in the wake of concerns following the collapse of two Bear Sterns hedge funds, the claims assert;

-- Schwab's management on Nov.  2, 2007 filed with the SEC the Schwab YieldPlus Fund annual report for the period ending Aug. 31, 2007.  The annual report disclosed the fund's total net assets  ($10.696 billion) but failed to disclose the approximately $2.8 billion in investor redemptions that took place in August 2007.  The redemptions were also not disclosed in the revised prospectus for the YieldPlus Fund filed Nov. 14, 2007. By Nov. 30, 2007, the Schwab YieldPlus Fund's total net assets had dropped further to  $8.027 billion, a $5.464 billion or 40.5 percent decline from the fund's total net assets of $13.5 billion on July 31, 2007, the claims assert;   

-- Schwab ignored the warnings of securities and banking regulators about the risky nature of mortgage backed securities and collateralized mortgage obligations that date back to the early 1990s. Securities regulators, including FINRA (formerly known as NASD) warned member firms as early as 1992 to refrain from deceptive advertising of CMOs including comparisons to certificates of deposits. Banking regulators warned of the liquidity risks of CMOs, the claims assert; and

-- Charles Schwab executives and former high profile fund manager Kimon Daifotis committed misconduct when they embarked on a "damage control" campaign to avert liquidations of Schwab YieldPlus by Charles Schwab retail clients. Behind the scenes, Schwab dumped 2.9 million YieldPlus shares from the portfolios of its other proprietary mutual funds from Jan. 31, 2008 to April 1, 2008 while unwitting Schwab clients simultaneously held on to their shares, the claims assert. 

 "By comparing YieldPlus to the average losses suffered by other ultra-short term bond funds as a whole, it becomes clear that it was Schwab's reckless fund management and not the 'market' that caused the damages in these cases," investor attorney Chris Vernon said.

"The tragedy is that these cases involve people who were attempting to avoid the risks of the 'market' and willingly gave up the potential reward that goes with higher risk. They suffered significant losses to their principal because the fund was dramatically riskier than Charles Schwab portrayed it," Vernon said.

 

Contact:

-- Thomas F. Shine, a former Securities and Exchange Commission Division of Enforcement attorney (Florida, 800-838-8320, www.thomasfshinelaw.com);

-- Christopher T. Vernon, an investor rights attorney who represents investors throughout the United States (Florida, 239-649-5390, www.vernonhealy.com);

-- Thomas D. Mauriello, an investor rights attorney who represents investors throughout the United States (California, 888-612-1961, www.maurlaw.com);

-- Timothy J. Dennin, a former Securities and Exchange Commission Division of Enforcement attorney and former assistant district attorney, (New York, 212-826-1500, www.denninlaw.com)

Tags:

California investor rights attorney Thomas Mauriello, of the Shine-Vernon legal team, files claims on behalf of Schwab YieldPlus Fund (SWYSX) investors with more than $200,000 in losses

By
Sara
on March 26, 2009 1:04 PM |
March 5, 2009, San Francisco, California -- Three California retirees with principal losses totaling over $200,000 filed claims today against Charles Schwab & Co. and its former high-profile fund manager, Kimon Daifotis, asserting that Schwab deceptively marketed its Schwab YieldPlus Fund as a "cash alternative" with safety comparable to that of 1 and 2-year certificates of deposits.  

The Schwab YieldPlus Fund, (SWYSX), which was marketed to investors as a safe, ultra short-term bond fund, actually contained high concentrations of mortgage- and asset-backed securities that exposed fund investors to the risk of substantial losses of principal, the claim asserts.

"The Schwab YieldPlus Fund was significantly riskier than Charles Schwab represented," 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.

Mauriello noted that shares of other ultra short-term bond funds lost less than 2 percent of their value, on average, from June 30, 2007 to June 30, 2008.  During that same time, Schwab YieldPlus Fund shares dropped 31.62 percent -- a loss that was more than double the decline of the S&P 500 Index for the relevant period.

"The Schwab YieldPlus Fund is virtually alone among its peers in exposing conservative investors to these kinds of steep losses of principal," Mauriello said.

Moreover, Schwab profited handsomely from its deceptive marketing of the Schwab YieldPlus Fund to conservative investors as the fund experienced tremendous growth, according to the claim.

From 2003 to 2007, Charles Schwab Investment Management, a wholly-owned subsidiary of parent Charles Schwab Corp., saw its annual management fees of the Schwab YieldPlus Fund grow by 600 percent, the claim states. Schwab earned management fees of $76 million during that time, as the fund grew to peak net assets of $13.5 billion on July 31, 2007.    

By May 31, 2008, the fund's net assets had plunged by more than 96 percent to $507 million.  

This risky investment composition of the Schwab YieldPlus Fund by fund managers compromised the fund's liquidity 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.     

One of the retirees who filed a claim today, a 69-year-old widow from Rio Vista, California, thought her investment in the Schwab YieldPlus Fund was virtually the same as a money market fund investment based on the representations of her Schwab investment advisor, the claim states.

Also filing a claim today was a retired couple from Solvang, California who lost approximately $166,000 of their principal investment in the Schwab YieldPlus Fund.

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 D. Mauriello, an investor rights attorney who represents investors throughout the United States (California, 888-612-1961, www.maurlaw.com);

-- Thomas F. Shine, a former Securities and Exchange Commission ("SEC") Division of Enforcement attorney (Florida, 800-838-8320, www.thomasfshinelaw.com);

-- Christopher T. Vernon, an investor rights attorney who represents investors throughout the United States (Florida, 239-649-5390, www.vernonhealy.com)




Tags:

Shine-Vernon legal team: Fund Manager of Schwab YieldPlus Fund (SWYSX) and Schwab California Tax Free YieldPlus Fund (SWYCX) deceived retirees with assurances of safety

By
Sara
on February 13, 2009 8:00 AM |

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

Tags:

Shine-Vernon legal team forms alliance with former SEC regulators to investigate Schwab YieldPlus Fund, files claim on behalf of investor who lost more than $225,000 on YieldPlus (SWYSX, SWYPX)

By
Sara
on February 12, 2009 11:15 AM |
Naples, Fla. -- The Shine-Vernon legal team has formed a coast-to-coast alliance with other former Securities and Exchange Commission regulators, former prosecutors and investor advocates to investigate misconduct and seek recovery of losses for purchasers of the Schwab YieldPlus Fund.

Securities fraud litigators in the alliance have now filed claims on behalf of both corporate and individual investor clients in California, New York, Texas, Florida, Missouri, Minnesota, Illinois and Hawaii, and are currently investigating claims on behalf of investors in multiple other states.

The team filed another arbitration claim today on behalf of a California retiree who sustained more than $225,000 in Schwab YieldPlus Fund losses in his retirement savings account. Just prior to investing in the Schwab YieldPlus Fund, the retiree had the bulk of his retirement savings in cash or money market funds. Today's claim follows earlier claims filed by the team on behalf of corporate and small business owners, a retired publisher, a retired accountant, a retired emergency room physician, a retired computer consultant and an 82-year-old widow -- among others.

Charles Schwab & Co. marketed its Schwab YieldPlus Fund as a safe "cash alternative" to retirees and others around the country, but that safety was a charade: The Schwab YieldPlus Fund has lost more than 40 percent of its value in the past 18 months because of the reckless concentration of mortgage and asset-backed securities in the fund by former high-profile fund manager Kimon Daifotis.

Charles Schwab issued inaccurate statements or omitted information regarding material facts about the fund's lack of diversification and deceived Schwab YieldPlus Fund investors by concentrating the fund in mortgage and asset-backed securities while it touted the fund's safety on its web site and to financial advisors who recommended the fund, the claim states. Charles Schwab compared the safety of its Schwab YieldPlus Fund to that of one and two-year certificates of deposit.

"People from all walks of life invested in Schwab's YieldPlus Fund, and investors who sought safety in YieldPlus are now paying dearly for Schwab's betrayal," securities attorney Christopher Vernon said. "We believe we've assembled an exceptional group of attorneys to bring claims on behalf of Schwab YieldPlus investors seeking recovery."

For in-depth information about the Schwab YieldPlus Fund, see  http://www.protectinginvestors.com and http://www.thomasfshinelawblog.com

The alliance includes:

  • Christopher Bebel, a former Securities and Exchange Commission Division of Enforcement attorney, former regulator with the Financial Industry Regulatory Association (aka NASD) and former federal prosecutor, (Texas, 281-348-2572, www.chrisbebel.com);
  • Timothy Dennin, a former Securities and Exchange Commission Division of Enforcement attorney and former assistant district attorney, (New York, 212-826-1500, www.denninlaw.com);
  • Thomas Mauriello, an investor rights attorney who represents investors throughout the United States, (California, 888-612-1961, www.maurlaw.com);
  •  Howard Prossnitz, an investor rights attorney who represents investors throughout the United States (Illinois, 312-960-1800, www.prossnitzlaw.com);
  • Thomas Shine, a former Securities and Exchange Commission Division of Enforcement attorney (Florida, 321-724-4445, www.thomasfshinelaw.com);
  • Christopher Vernon, an investor rights attorney who represents investors throughout the United States (Florida, 239-649-5390, www.vernonhealy.com) 

Tags:

Shine-Vernon legal team files claim on behalf of corporate client in California over Schwab YieldPlus Fund losses

By
Sara
on December 18, 2008 1:24 PM |
Charles Schwab & Co.'s misrepresentations about the safety of the Schwab YieldPlus Fund caused considerable harm to the business operations of a California-based company, according to a claim filed with FINRA Dispute Resolution today by the investor rights' legal team headed by former Securities and Exchange Commission attorney Thomas F. Shine and investor rights' attorneys Christopher T. Vernon and Thomas D. Mauriello.

The San Diego-based corporation, which develops service solutions for small businesses and consumers, had recently sold one of its business segments and its executives were looking for a safe place to invest the sales proceeds while they laid the groundwork for developing a new line of business for the company.  

Charles Schwab's web page promoting its Schwab YieldPlus Fund invited investors to "discover a smart alternative for your long-term cash." Charles Schwab touted the Schwab YieldPlus Fund as a safe and conservative "cash alternative" and compared its safety to that of one and two-year certificates of deposit, but investors have seen the bond mutual fund's price fall by almost 40 percent during the past sixteen months.

The claim alleges that Charles Schwab issued inaccurate statements and omitted material facts about the fund's lack of diversification and deceived Schwab YieldPlus Fund investors by concentrating the fund in mortgage and asset-backed securities while it recklessly touted the fund's safety on its web site and to financial advisors who recommended the fund.

In addition, Charles Schwab executives and former high profile fund manager Kimon Daifotis committed misconduct when they embarked on a "damage control" campaign to avert liquidations of Schwab YieldPlus by Charles Schwab clients, the claim contends. Behind the scenes, Schwab dumped 2.9 million YieldPlus shares from the portfolios of its other mutual funds from Jan. 31, 2008 to April 1, 2008 while unwitting Schwab clients simultaneously held on to their shares.

The Shine-Vernon legal team believes that this case is a prime example of the adverse economic consequences of the misconduct and deceptions engaged in by financial firms like Charles Schwab in recent years. It's not only retirees who've been hurt, but also companies small and large who thought they were maintaining their operating capital in safe, conservative accounts.

"This is the type of financial institution behavior that can have a direct impact on Main Street's ability to create and protect jobs and this misconduct should not go unpunished," Vernon said. In addition to the arbitration claim filed on behalf of the corporate client described herein, which will be heard in San Diego, the Shine-Vernon team has filed arbitration claims against Charles Schwab with the Financial Industry Regulatory Association (FINRA) on behalf of investors from California, New York, Texas, Florida, Missouri, Minnesota, Illinois and Hawaii and is currently investigating claims in New Mexico, Virginia, and several other states as part of its nationwide fraud investigation of the Schwab YieldPlus Fund.

Thomas Shine, a former enforcement attorney with the Securities and Exchange Commission in Washington, D.C., is in private practice in the Melbourne, Fla. area. Securities attorney Chris Vernon is a founding partner of the Naples, Fla. based law firm Vernon Healy, which represents investors throughout the United States. Thomas Mauriello is in private practice in Southern California and represents investors throughout California.

Release URL: http://www.protectinginvestors.com/ For information, contact:


Thomas F. Shine, attorney at law

http://www.thomasfshinelaw.com http://www.thomasfshinelawblog.com
321-724-4445
1-800-838-8320
e-mail: tfshine@aol.com

or
Christopher T. Vernon, attorney at law
http://www.vernonhealy.com
http://www.protectinginvestors.com

239-649-5390
1-877-649-5394
e-mail: cvernon@vernonhealy.com


or
Thomas D. Mauriello, attorney at law
 http://www.maurlaw.com
949-542-3555
1-888-612-1961
e-mail: tomm@maurlaw.com

Tags:

Search

  • Case sensitive
  • Regex search

Tags

Find recent content on the main index or look in the archives to find all content.

Categories

Monthly Archives

Pages

Powered by Movable Type 4.1