Protecting Investors - Schwab YieldPlus Fund, Auction Rate Securities, Lehman Brothers Principal Protected Notes

Update for Investors Who Purchased Lehman Principal Protected Notes

Lehman Brothers principal protected notes and structured notes, which were typically pitched by brokers as safe investments that protected investors from losing their principal, today are mostly illiquid and trading for pennies on the dollar. According to a spokesman from SecondMarket, Lehman principal protected notes are selling for 10 to 14 cents for every dollar of principal invested.

The tragic part of these cases is that the investors who are getting hammered are not big risk takers.  They are typically conservative investors who were motivated by a sales pitch that focused on the safety and security of these very complex products. With respect to the product itself, the recent massive uptick in sales of principal protected notes is a classic case of major brokerage firms pushing their sales forces to dump these products onto their own retail customers as they come off the “underwriting assembly line.”  

Litigation and Arbitration claims will further reveal the extensive conflicts of interest that existed between the best interests of the brokerage firms and the best interests of their retail clients who trusted the firms.  Litigation and Arbitration will also likely reveal that a number of financial advisors did not have a genuine understanding of this product they were selling to retail customers.

Unfortunately, it doesn’t appear that these investments will benefit from government efforts to shore up the financial markets because these principal protected and structured notes were frequently tied to derivatives. The government announced in October that derivative products aren’t eligible for government backing.

The banks and brokerage firms who sold these products — primarily UBS (UBS), Merrill Lynch (MER), Barclays (BCS) and Wachovia (WB) — misrepresented the safety of these Lehman notes and neglected their duties to investors. According to Bloomberg, investors held more than $8 billion in Lehman structured notes as of September, with $2.8 billion of those sold in 2008.

Christopher T. Vernon, attorney at law
e-mail: cvernon@vernonhealy.com

(239) 649-5390

Shine and Vernon legal team files claims to recover Schwab YieldPlus Fund losses (SWYSX, SWYPX) on behalf of investors from California, Texas and New York in October

As part of its investigation on behalf of Schwab YieldPlus Fund investors, the Thomas F. Shine –Christopher T. Vernon legal team has discovered that former high-profile Schwab fund manager, Kimon Daifotis, has been replaced as the fund’s lead portfolio manager and has been terminated by Charles Schwab, the brokerage firm.

Shine and Vernon were the first attorneys to file an investor claim naming Daifotis as a respondent. One day after filing that claim in June, Charles Schwab announced that it had replaced Daifotis as the YieldPlus Fund manager. 

The revelation about Daifotis’ departure and his termination by brokerage firm Charles Schwab is part of an investor rights claim filed today by the Shine-Vernon legal team on behalf of a retired U.S. Air Force officer and nurse anesthetist from Texas.

The investor rights’ legal team headed by former Securities and Exchange Commission attorney Shine and investor rights’ attorney Vernon has filed claims on behalf of Schwab YieldPlus investors in California, New York & Texas during the month of October. The claims follow earlier claims filed in Florida and Hawaii. The team is preparing to file claims on behalf of investors in New Mexico, Missouri, Minnesota, and Illinois and is interviewing clients from other states as well.

Charles Schwab marketed its 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. More and more investors are seeking to file claims with the Financial Industry Regulatory Association seeking legal recourse. The claims, including one filed today on behalf of the Texas investor, assert that Charles Schwab deceived YieldPlus investors with the reckless mortgage and asset-backed security strategy orchestrated in the Schwab YieldPlus Fund. The claim contends that Charles Schwab committed gross misconduct when it embarked on a “damage control” campaign to avoid liquidations of YieldPlus by its clients. Behind the scenes, Schwab quietly dumped 2.9 million YieldPlus shares from the portfolios of its other mutual funds during that time — from Jan. 31, 2008 to April 1, 2008.

Investors represented by the Shine-Vernon legal team also claim that Charles Schwab and Daifotis misrepresented the safety of YieldPlus and failed to disclose material facts to investors about the fund. The bond mutual fund’s price has decreased by almost 40 percent during the past sixteen months.  This price decrease has resulted in the virtual liquidation of the Schwab YieldPlus Fund (SWYSX, SWYPX) with the fund’s total net assets under management declining by more than $13 billion or — 96 percent — over the past year.

Investors have been encouraged by a recent case in which a FINRA arbitration panel awarded a Schwab YieldPlus Fund investor more than $500,000.

Independent investment advisors who use Charles Schwab as a platform have referred clients to the Shine-Vernon legal team, and some are even considering their own recourse in the face of damage to their business reputations and loss of clientele due to misrepresentations surrounding the safety of the Schwab YieldPlus Fund.     

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.

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

Politicans use fear to gain support for Wall Street Bailout

Only two things have changed since the House of Representatives voted down the bailout package on Monday.
 
First, the Senate has played with and passed a bill that is worse than the bill the House voted down.   As a result of Senate tinkering, it is my understanding that the bill has grown from a $700 billion bill to an $850 billion bill through earmarks, including tax benefits for the film and television industry, the liquor industry (Puerto Rican Rum), auto racing industry, wool industry and Washington, D.C.

Apparently, by providing earmarks that help selective industries and selective groups, the Senate is not attempting to improve the likelihood that the bill will resolve the current credit crisis.  Rather, it appears the Senate is using the extra $150 billion in "pork" to entice a few more House members to change their previous “no” votes to “yes” votes.  Some would call this an attempted bribe, and most would call it a classic example of why earmarks have come to symbolize what is wrong with politics on the federal level. 
 
The second thing that has changed since the House voted down the bailout package is that Washington has attempted to scare the American public into supporting the Bailout Bill.   I urge you not to listen to these politicians.  Instead, listen to the reputable economists and financial experts who have no connection to any political group, Wall Street or the financial establishment.    Most agree that the problems the politicians are trying to scare us with will be temporary; the problems will likely occur and are already occurring with or without the bailout; and that the long-term effect of this bailout will be harmful to our country and to us as its citizens. 
 
Thus, other than fear or bribery, there is no reason for the American public or the House members who previously voted against the bailout to feel any differently now.    The Bailout Bill remains a way for the current politicians in power and the current financial institutions in power to continue to control our economy.   I think most Americans understand that there will be some short-term benefit to them if the Bailout Bill passes, but I think that they are very upset about two things that the Bailout bill will also deliver: A long-term drag on our economy and a  big windfall for the politicians and the financial institutions on Wall Street who are partly responsible for creating this mess.

The current bill is so bad – like putting duct tape on a house of cards – that many Americans would prefer either of the following as an alternative: A recession and recovery that puts America's financial situation back on solid footing in the long term; or a bill which authorizes the government to loan money to the ailing financial institutions and use the toxic products and other assets owned by the financial institutions as collateral.  Such a loan plan, if a bailout has to occur, at least forces the troubled financial institutions to deal with the mess they created.  
 
If you agree with the analysis above, I request that each of you call and e-mail as many House members as you can today and tell them that you want them to vote against the Bailout Bill scheduled to be voted on today.

Capitalism is already at work to set our financial system straight

A revolt in the U.S. House of Representatives shows that prudent lawmakers have recognized that capitalism is already at work to right our nation’s financial system without government interference.  According to the Wall Street Journal, more than 50 new vulture firms have been formed to purchase some of the commercial mortgages and mortgage securities in the current inventory of some of these failing financial institutions.

  

Unwilling to wait for the economy to rebalance, Congress  prepared to inject $700 billion dollars into the system to create artificial demand for the distressed assets in play.   However, prudent leaders realize that taxpayers will suffer the unintended consequences of our lawmakers’ efforts to play God with the economy.   Although the current focus needs to remain on the bailout, soon we will have to ask the question:  How did we reach the brink of what some are claiming will be economic disaster for the U.S. without knowing it was coming or trying to stop it? Is the current crisis a product of ignorance or dishonesty?  

 

Based on the Wall Street Journal’s coverage of the ongoing bailout negotiations, here is my take on the plan in the form that went to lawmakers for a vote:  

 

The “Troubled Asset Relief Fund” (TARF) would be made law and initially funded with $350 billion in taxpayer funds without the public —or the politicians— knowing what the government will be paying for these assets.   On the other hand, thanks to public outcry which slowed down the process, it appears that Treasury Secretary Henry Paulson’s plan will be subject to significantly more oversight than what Paulson initially envisioned, and it will include a program to insure mortgage backed securities based on premiums collected for that insurance.  While Paulson may be one of the greatest financial minds in the U.S., no one should have as much discretion as he originally wanted in doling out $700 billion to his old friends on Wall Street.  

 

It appears that most of the institutions in distress will be bidding to sell in a reverse auction.   However, if the government does not overpay at rates significantly over market price for these financial products, then these financial institutions will likely sell the products to private firms at market price because doing so will allow them to forgo any restrictions the government may place on the firms engaging in these transactions. 

 

Alternatively, the firms may hold these products on their books instead of selling them if the government will not pay a premium for them. Also the public should understand, with respect to these firms, there is no provision in this Bailout Plan which will have any effect on current “golden parachute” exit plans for current executives —i.e. the executives that helped to put the company in its current difficulties.  In fact, if I understand it correctly, the current executive pay provisions of the Bailout Bill will only affect these companies’ ability to bring on new and better management by limiting the creation of “golden parachutes” going forward.   Similarly, the government will receive only a nominal potential upside in terms of a future equity stake in the companies participating in the reverse auctions. 

 

The weakest of the weak institutions at issue  — the firms that have made the worst business decisions and that have the least justification for staying in business — will likely sell their toxic products directly to the government rather than through the reverse auction process. Again, the concept behind the bailout is to provide enough money to these failing financial institutions to keep them operating and functioning and so the government may have to grossly overpay for the toxic products that they buy directly from these institutions. Also, this is the only situation in which executive pay will really be affected: For example, if these terribly run organizations that made bad business decisions are able to sell their toxic products at a premium to the government, then their executives’ “golden parachute” exit pay provisions will be cancelled. Similarly, this is the only situation in which the government will receive a significant equity stake or potential upside in the company. In other words, the government will only own a significant portion of the very worst of the weak institutions at issue in this crisis.

 

Although a provision was added over the weekend that allows the government to try to seek reimbursement from the financial institutions if this deal turns out to be a net loss to the taxpayers, those companies may well be out of business when the government comes calling.  Furthermore, this would require the members of Congress to go after the Wall Street firms who will likely support them all in their election campaigns. This appears to be an attempt by the politicians to appease voters with promises that they hope will be forgotten once the current crisis has passed.

 

The protections for homeowners added to the Bailout Bill may also be an empty promise.  While the intentions may have been good, by the time the benefits trickle down to individual homeowners, they are likely to be too late and too insignificant to do anything other than slow down the already deep correction in the residential home market. If lawmakers are unwilling to leave this problem to the market place, they should address it in separate legislation.

 

All told, the efforts by lawmakers this weekend to revise the Bailout Bill appear to be mostly window dressing: This is a way for the politicians to appease voters while allowing what may go down as perhaps the biggest government bailout of private enterprise in our nation’s history. Although I hope I am wrong, I have  very serious doubts about the prediction by some that the federal government will actually make this a profitable venture for taxpayers when they ultimately resell the toxic products they now plan on spending $700 billion to purchase.