Protecting Investors - Leveraged ETFs, Inverse ETFs, Lehman Brothers Principal Protected Notes, Structured Products, REITs, Bonds

Shine-Vernon legal team adds Minnesota and Missouri to list of states in which it has filed investor claims to recover Schwab YieldPlus Fund losses (SWYSX, SWYPX)

The investor rights’ legal team headed by former Securities and Exchange Commission attorney Thomas F. Shine and investor rights’ attorney Christopher T. Vernon filed claims on behalf of Schwab YieldPlus Fund investors in Minnesota and Missouri today.

The Shine-Vernon team has now filed arbitration claims on behalf of investors from California, New York, Texas, Florida, Missouri, Minnesota, and Hawaii as part of its nationwide fraud investigation of Charles Schwab’s misrepresentations to investors about its Schwab YieldPlus Fund.

Charles Schwab promoted its 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. More and more investors are seeking to file claims with the Financial Industry Regulatory Association (FINRA) in their quest for legal recourse.

Charles Schwab deceived Schwab YieldPlus 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 to investors. According to the claims filed today, Schwab issued inaccurate statements or omitted information regarding material facts about the fund’s lack of diversification.  

In addition, Charles Schwab executives and former high profile fund manager Kimon Daifotis embarked on a “damage control” campaign to avert liquidations of Schwab YieldPlus by Charles Schwab clients, the claims contend. 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 — while clients held their shares.

The claims filed today are on behalf of investors with close to $300,000 in losses. They include one claim filed on behalf of a retired publisher of a faith-based journal and another on behalf of a business owner. Both investors were seeking safety for the funds that they invested in the Schwab YieldPlus Fund.

The Shine-Vernon team was the first legal team to name Daifotis in claims filed on behalf of investors. Schwab disclosed in June that it had replaced Daifotis as the fund’s lead portfolio manager and Daifotis has been terminated by Charles Schwab, the brokerage firm. 

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

Although the economic outlook of many financial industry firms has been damaged in the ongoing credit crisis and recession (in no small measure because of the imprudent risks these firms took at investors’ expense), the Shine-Vernon team believes that Charles Schwab is financially strong enough to pay all damages awarded against it.

Investors who lost relatively small amounts of their principal may be able to get relief from a class action lawsuit now pending against Charles Schwab, to the extent they cannot resolve their claims through Schwab’s Client Advocacy Team.  However, investors who have lost significant amounts of principal as a result of investing in YieldPlus, should pursue securities arbitration, the Shine-Vernon legal team believes.    

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