Results tagged “investor losses” from Thomas F. Shine Law Commentary

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)

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)