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

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

Conservative investors betrayed by Wall Street excesses

These are chaotic times on Wall Street. With each passing day it’s becoming more and more evident that conservative “Main Street” investors — both businesses and individuals — have been profoundly damaged by the deceptive and speculative excesses that have plunged Wall Street’s major brokerages into a wide and deep crisis.

 

The rub is so raw because many of the investment products that have been contaminated by the subprime mess and ensuing credit crisis were marketed and sold to investors as ultra-conservative and safe “cash equivalents.”

 

This is a complete betrayal.

 

This betrayal is more egregious than what we saw with the Wall Street analyst cases and the bursting of the inflated tech bubble earlier this decade. We knew that tech stocks, the new economy growth stocks of the day, represented the fast lane.

 

The people hurt in the crisis today are people who were led to believe they were in the slow — and safe — lane.  As a result, this crisis is really hurting people who didn’t intend to put their money at risk.

 

These are retirees and folks saving for retirement who carefully guarded their nest eggs. These are small business owners and corporations that carefully guarded their operating funds.  These are funds of charities and churches earmarked for future use to help those in need and the less fortunate among us. Regardless of any perspective or bias, virtually all would agree that these are people who didn’t deserve to lose their principal or have their liquid funds frozen.

 

In the last year, thousands of investors have lost more than $1 billion in Schwab’s YieldPlus Fund, which Schwab billed as a cash equivalent and likened its safety to that of one and two-year certificates of deposit.  Equally disturbing is the almost surreal debacle that’s played out in the $330 billion auction rate securities market that seized up in February and has left tens of thousands of investors unable to readily access their money.   These are just examples of some of the “safe” products that have performed far differently than advertised.

 

State securities regulators, most notably New York Attorney General Andrew Cuomo, have stepped in on behalf of investors to force the Wall Street firms involved to buy back $70 billion worth of auction rate securities from investors. But with the market at $330 billion before it froze, a substantial hole in the economy remains. 

 

Recently, federal regulators stepped in to save Fannie Mae and Freddie Mac,  and more recently AIG, but these actions have not prevented investors in those behemoths from being devastated in ways similar those who invested in the now bankrupt Lehman Brothers. 

 

Certainly there will be more calls for reforms.  Hopefully, lawmakers will recognize that the failure exposed by the current crisis is not that there are too few regulations or too few regulatory bodies.  With the exception of areas that operate outside the current regulatory system — such as credit default swaps which may need to be brought within the regulatory system as insurance or futures products — lack of regulation and lack of regulatory agencies are not the problem.  Rather what we’re seeing is widespread amoral behavior by Wall Street combined with a failure by regulators to regulate effectively — especially on the federal level.  This appears to be due to both the under-funding of existing regulatory agencies and the apparently cozy relationship between Wall Street and some regulatory bodies, specifically the Securities and Exchange Commission and the industry’s self-policing organization, the Financial Industry Regulatory Association or FINRA.

 

Much is at stake for the financial future of Americans in the coming weeks and months.  As we see the most recent misdeeds of Wall Street play out in the press and the political arena, investors need to understand that state regulators have been the most effective in protecting investors’ rights and federal regulators the least effective.  Adding another regulatory body on the federal level or transferring additional regulatory powers from the states to the federal government is unlikely to improve the situation. 

 

Additionally, while the current mess is being cleaned up through litigation, arbitration, and possible reforms, investors need to be wary of Wall Street’s claims that firms’ amoral behavior is an anomaly.  Combined with Wall Street firms’ actions of the past — such as the limited partnership mess of the early 1990s and the analyst debacle early this decade — recent events appear to be part of a familiar pattern.            

Vernon and Shine legal team: Florida retirees file arbitration claim to recover Schwab YieldPlus Fund losses (SWYSX, SWYPX)

A group of Florida retirees — whose losses in the Schwab YieldPlus Fund top $300,000 — have joined together to file arbitration claims today against Charles Schwab & Co. and former fund manager Kimon Daifotis. 

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 on the Schwab web site.

But several Florida retirees who trusted Schwab with their nest eggs are now filing a claim with FINRA, the Financial Industry Regulatory Authority, asserting that Schwab deceived them with the reckless mortgage and asset-backed security strategy orchestrated in Schwab’s YieldPlus Fund.

The bond mutual fund’s price has decreased by more than 30 percent in the last year.  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.  

The three Florida families who joined together to file today’s small group claim include:  an 82-year-old widow from Vero Beach; a retired computer consultant and artist from Longwood; and a retired accountant and homemaker from Port St. Lucie. All were longtime clients of Charles Schwab & Co.

The claim, filed by former Securities and Exchange Commission attorney Thomas F. Shine and investor rights attorney Chris Vernon, contends that 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. The investors also claim Schwab and Daifotis misrepresented the safety of YieldPlus and failed to disclose material facts to investors about the fund.

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

Schwab is contacting some investors with settlement offers, but investors with larger losses are filing arbitration claims in the face of Schwab’s offers to pay pennies on the dollar (if anything) and refusal to acknowledge any wrongdoing or remorse for its actions.

In addition to representing Florida investors, Shine and Vernon are pursuing claims against Schwab on behalf of investors from California, Hawaii, Texas, New York and the Midwest.  

Shine, a former enforcement attorney with the Securities and Exchange Commission in Washington, D.C., is in private practice in the Melbourne, Fla. area. 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:

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 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

Charles Schwab Reporting YieldPlus Complaint Letters From Clients as Complaints Against Financial Consultants

Charles Schwab financial consultants are starting to get dinged on their CRDs, the regulatory report card for stockbrokers, over the Schwab YieldPlus Fund fiasco. These dings can come in cases when the financial consultants relied on defective information from their employer, Charles Schwab, regarding Schwab’s YieldPlus fund.  

Charles Schwab clients, who appropriately feel betrayed by the charade of safety that Charles Schwab used to market its YieldPlus Fund, have in some cases sent letters to Charles Schwab complaining about their financial consultants who recommended the fund as a safe alternative to cash. These complaint letters are typically entered on a broker’s CRD report that’s accessible to the public via the web site tool sponsored by FINRA, the Financial Industry Regulatory Authority.

Financial consultants (as well as Charles Schwab) clearly have “Know Your Security” suitability duties to know the essential facts about the products that they are recommending to their clients and to disclose the risks associated with those products. However, Charles Schwab financial consultants may feel that the risks pertaining to the Schwab YieldPlus Fund were not adequately disclosed in the fund’s prospectus and other SEC filings.  Charles Schwab financial consultants may also feel that they were further misled by Schwab YieldPlus Fund marketing materials that effectively described the fund as an alternative to cash.

Moreover, Charles Schwab conducted a “damage control” campaign designed to provide Charles Schwab financial consultants with information that would deter them from recommending to clients that they sell the fund as the price declined. This damage control campaign occurred so that Charles Schwab could quietly dump several million shares from other Charles Schwab proprietary funds ahead of Charles Schwab’s retail clients, according to claims we’ve filed so far or are preparing to file on behalf of investors from Florida, Hawaii, Texas, California, New York, and other states.

Some Charles Schwab financial consultants (and former consultants) may ultimately be supportive of clients who pursue YieldPlus claims against Schwab and agree that Charles Schwab misled investors.  Merely sending a complaint letter to Charles Schwab, as opposed to filing an arbitration claim or lawsuit against Charles Schwab, does little to assist the investor in recovering losses or damages from Charles Schwab. Similarly, the complaint letter does little harm to Charles Schwab but opens the door for Charles Schwab to file regulatory reports that disclose that a customer has complained about one of its brokers in connection with the sale of YieldPlus. 

 

Shine and Vernon legal team: Retiree Suing to Recover Significant 401(k) Losses in Schwab’s YieldPlus Fund Fiasco

Naples, Fla. — Charles Schwab & Co.’s removal of one of its most prominent fund managers has come too late for investors now suffering the disastrous consequences of the reckless mortgage and asset-backed security strategy orchestrated in Schwab’s YieldPlus Fund.

A retired emergency room physician from Hawaii, who lost more than $150,000 of the $510,000 he invested in Schwab’s YieldPlus Fund in his 401(k), filed an arbitration claim today that seeks recovery of his losses and damages.         

Schwab marketed its YieldPlus Fund to retirees and others as a safe and conservative “cash alternative” but the bond mutual fund’s price has decreased by more than 30 percent in the last year.  This price decrease has resulted in the virtual liquidation of the Schwab YieldPlus Fund (SWYX, SWYPX) with the fund’s total net assets under management declining by more than $13 billion or — 96 percent — during the past year.   

Schwab is contacting some investors with settlement offers, but investors with larger losses are filing arbitration claims in the face of Schwab’s typical offers to pay less than 10 cents on the dollar. Schwab’s offers come despite investors’ claims of misrepresentations and failures to disclose material facts by Schwab and former Schwab Yield Plus Fund manager Kimon Daifotis about the safety of the YieldPlus Fund to investors.

The claim, filed by former Securities and Exchange Commission attorney Thomas F. Shine and investor rights attorney Chris Vernon, contends that Schwab committed gross misconduct when it embarked on a “damage control” campaign and encouraged investors to hold on to their YieldPlus shares. 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.

On Schwab’s web site, the brokerage giant compared the safety of its YieldPlus Fund to that of one and two-year certificates of deposit. But that safety was a sham: YieldPlus fund manager Daifotis put increasing portions of the fund’s assets into higher risk asset-backed and mortgage backed securities. That concentration ultimately put the fund at risk for an enormous failure. That failure began as the subprime crisis rocked Wall Street.   

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

Investors from around the country are contacting Shine and Vernon, who have teamed up with other former SEC attorneys and investor rights attorneys on their investigation.

We are encouraging investors who’ve been contacted by Schwab to ask Schwab to retain custody of taped conversations between themselves and their investment advisor: We believe these recorded conversations will strengthen your potential claim against Schwab because it is unlikely that Schwab’s employees were even aware of the true level of risk associated with the fund, much less able to adequately disclose those risks to potential purchasers.

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

For more 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

Calculating Your Schwab YieldPlus Fund Losses

Prior to contacting the Charles Schwab Client Advocacy Team to discuss your Schwab YieldPlus Fund losses, we are recommending to our potential clients that they prepare a Profit/Loss spreadsheet that chronologically reflects all of their purchases, dividends (reinvested and/or distributed) and sales of the fund’s shares.  Such a spreadsheet should include date of transaction, a description of the transaction (original purchase, dividend reinvestment or distribution, or sale), number of shares, price per share, and the total dollar amount purchased, sold or actually received as a dividend.  This spreadsheet will assist you with your negotiations with Charles Schwab.  In the event that those negotiations are unsuccessful, the spreadsheet is an excellent tool to assist you and your attorney in preparing your claim for arbitration or litigation.

There are two ways that you can obtain your spreadsheet information.  The more time consuming method would be to take the information directly from each of your monthly statements from the month that you initially purchased the fund through the month that you completely liquidated your holdings.  The simpler and probably quicker method of obtaining this information is to ask your Charles Schwab Financial Consultant to provide to you what is called an “Account History” for your transactions in the Schwab YieldPlus Fund.  We have found that the various Charles Schwab Financial Consultants have been very cooperative in providing this service to their clients to assist them in evaluating their options in pursuing a recovery of their Schwab YieldPlus Fund losses.

Please feel free to contact Chris Vernon at (239) 649-5390 or Tom Shine at (800) 838-8320 if you wish to consult with either of us about any of the matters discussed above.  We are in the process of signing up additional Schwab YieldPlus clients (generally those clients who lost more than $20,000 in the fund) and expect to be filing a number of new claims in the very near future.

Schwab announces replacement of YieldPlus portfolio manager after Vernon Healy - Shine legal team files claim

Charles Schwab & Co. announced the replacement of Kimon Daifotis, Schwab’s YieldPlus portfolio manager, one day after our legal team filed what appears to be the first investor arbitration claim that names Daifotis as an individual respondent.

Our claim, filed on June 12, 2008, asserts that Daifotis, one of Schwab’s most prominent fund managers, misrepresented the safety of Schwab’s YieldPlus Fund (SWYSX) whose total net assets plunged by $12 billion during the eight-month period ending April 1, 2008. Daifotis put increasing portions of the fund’s assets into risky mortgage-backed securities and put the fund at risk for a huge failure when the subprime lending credit crisis rocked Wall Street.

On June 13, 2008, Schwab Investments filed an amended prospectus with the Securities and Exchange Commission that discloses (page 29) that Daifotis, a Senior Vice President and the Chief Investment Officer–Fixed Income for Charles Schwab Investment Management, Inc., had been replaced as the senior portfolio manager responsible for the overall management of the Schwab YieldPlus Fund and four other Schwab fixed income funds. Mr. Daifotis’ replacement is Jeffrey Mortimer, CFA, who is also a Senior Vice President and the Chief Investment Officer for CSIM.

We have spoken with a number of Schwab YieldPlus Fund shareholders over the past month who are weighing their options with respect to which route they might wish to follow in attempting to recover their losses.  Charles Schwab’s Client Advocacy Team appears to be proactively contacting Schwab YieldPlus Fund shareholders and making settlement offers to various individuals. 

In evaluating your recovery options, a practical first step would be to contact the Client Advocacy Team to explore whether Charles Schwab might be willing to make a reasonable settlement offer to you and, if so, how much Charles Schwab willing to offer to you.  The address and telephone number for the Charles Schwab Client Advocacy Team are as follows:

Charles Schwab & Co., Inc.
Client Advocacy Team
101 Montgomery Street
San Francisco, CA  94104-4104
(800) 468-3774

We are actively advising clients on how to best navigate this process to achieve the best results.

Some Schwab YieldPlus Fund shareholders are reporting to us that Charles Schwab Client Advocacy Team representatives are playing audiotapes of conversations that the shareholders had with Charles Schwab financial consultants or traders about the Schwab YieldPlus Fund when the shareholder initially communicated their orders to purchase the fund.  It is our belief and opinion that these recorded conversations will support rather than detract from the strength of your potential claim against Charles Schwab because it is highly unlikely that Charles Schwab’s employees were even aware of the level of risk associated with purchasing the fund, much less able to disclose those risks to potential purchasers of the fund. 

We are requesting that our prospective clients sign authorization letters instructing Charles Schwab to maintain custody, possession and control of these taped conversations for production during discovery and use in the presentation of our clients’ claims in their arbitration hearings.

Another topic that is coming up frequently during settlement discussions between Schwab YieldPlus Fund shareholders and Charles Schwab Advocacy Team members is the issue of what is the proper measure of the shareholder’s damages in the fund.  For purposes of arbitration or trial,  valid ways to calculate damages include “recissionary damages” and “well managed account damages.”  However, for settlement discussions in these types of cases, discussions often revolve around "out of pocket losses" which ignores the time value of money and any reasonable investment return. 

Not surprisingly, for settlement purposes, Charles Schwab appears to be focusing on its customers’ net out–of-pocket losses.  These losses are calculated by subtracting the total cost of all Schwab YieldPlus Fund purchases (including reinvestment of monthly dividends back into the fund) from the total net sales proceeds realized by the liquidation of all Schwab YieldPlus Fund shares owned by the shareholder plus the dividends actually received by the shareholder (that is, those dividends that were not reinvested back into the fund).   

Unfortunately, with respect to its out of pocket loss calculations, Charles Schwab appears to be improperly treating dividends reinvested back into the fund as distributions actually received by shareholders rather than money that was used to make additional purchases of the fund.  We believe that, conceptually, Charles Schwab’s methodology is incorrect and can result in a significant error in Charles Schwab’s favor in the computation of your net out of pocket losses for settlement purposes.

Your Charles Schwab monthly statements for the months in which you sold your Schwab YieldPlus Fund shares contains Charles Schwab’s calculations of the amounts of your losses resulting from your sale(s) of Schwab YieldPlus Fund shares (Realized Gain or Loss on Investments Sold).  You can also access this information for your account from the www.schwab.com/trading/center website. 

For investors who reinvested their Schwab YieldPlus Fund dividends back into the fund, Charles Schwab’s Realized Gain or Loss on Investments Sold calculation appears to accurately reflect your total net out-of-pocket losses for settlement purposes.  For investors who did not reinvest their dividends back into the fund, the amount of dividends received would reduce their net out-of-pocket losses for settlement purposes.

Please feel free to contact Chris Vernon at (239) 649-5390 or Tom Shine, at (800) 838-8320 if you wish to consult with either of us about any of the matters discussed above.  We are in the process of signing up additional Schwab YieldPlus clients (generally those clients who lost more than $20,000 in the fund) and expect to be filing a number of new claims in the very near future.

Investment Advisors angered by Schwab leaving larger YieldPlus investors in the lurch

Since news hit the street that Schwab is turning its back on its YieldPlus bond fund investors who have large losses, investment advisors have begun to vocalize their anger with San Francisco-based Schwab.

A story in InvestmentNews that broke this week quotes a number of investment advisors who said they’ll think hard next time before placing clients in a Schwab fund.

Richard Schroeder, an executive with Amherst, N.Y.-based Schroeder Braxton & Vogt Inc., told InvestmentNews that he doesn’t think Schwab is handling the situation properly. 

"We're just not comfortable with their fund management arm," Mr. Schroeder told InvestmentNews. "We don't give second chances."

Bloomberg reported earlier this month that Schwab is offering decent settlements to YieldPlus investors with smaller losses, but is offering less than 20 cents on the dollar to investors whose losses top $50,000.

Schwab billed its YieldPlus Fund as a safe alternative to cash, but that safety was a charade: Kimon Daifotis, the YieldPlus Fund portfolio manager, put increasing portions of the fund’s assets into higher yielding, but higher risk asset-backed and mortgage-backed securities. That strategy put the fund at risk for a huge failure, which began last summer when the subprime lending credit crisis rocked Wall Street.

Schwab’s YieldPlus Fund (SWYSX, SWYPX) had assets of $13.5 billion on July 31, 2007, but the fund went into a spectacular free fall that saw assets dwindle to just $1.5 billion as of April 1, 2008.

Vernon Healy and the Thomas F. Shine law firms are reaching out to investment advisors to help them get the best results possible for their investor clients. Vernon Healy and Thomas F. Shine were the first to file an investor claim naming Daifotis as an individual defendant.

Investors who’ve lost more than $50,000 should consider opting out of the many class action lawsuits that have been filed and instead consider pursuing an individual arbitration claim with FINRA, the Financial Industry Regulatory Authority.

Additional Reading:

• YieldPlus story in InvestmentNews
• Bloomberg story on YieldPlus

Investment Advisors or investors can Contact Vernon Healy toll free at 1-877-649-5394.

Florida Investor suing Schwab YieldPlus (SWYSX, SWYPX) Fund Manager

Naples, Fla. -- Charles Schwab & Co. Inc. and one of its most prominent fund managers, Kimon Daifotis, misrepresented the safety of Schwab’s YieldPlus Fund whose total net assets plunged by $12 billion during the eight-month period ending April 1, 2008, according to an arbitration claim filed today by a Florida investor who lost more than $100,000 in the fund.

The claim comes amidst Wall Street rumors, reported by Bloomberg on Tuesday, that Schwab is offering decent settlements to small investors but offering less than 20 cents on the dollar to those with losses topping $50,000.

Filed by former Securities and Exchange Commission enforcement attorney Thomas F. Shine and the law firm of Vernon Healy, the claim asserts that Schwab’s YieldPlus Fund portfolio managers liquidated more than 2.9 million shares of the fund while the company was encouraging customers to hold on to their shares.

Schwab’s YieldPlus Fund (SWYSX, SWYPX) had assets of $13.5 billion on July 31, 2007, but the fund went into a spectacular free fall that saw assets dwindle to just $1.5 billion as of April 1, 2008.

Daifotis managed the YieldPlus Fund, which Schwab sold to investors as a safe alternative to cash. The Schwab firm’s web site compared the fund’s safety to that of one and two-year certificates of deposit.

But the arbitration claim contends that the purported safety was a charade: Daifotis, the YieldPlus Fund portfolio manager, put increasing portions of the fund’s assets into higher yielding, but higher risk asset-backed and mortgage-backed securities. That concentration generated high-performance returns which helped the fund grow from $1.7 billion in February 2003 to $13.5 billion in July 2007. But Daifotis’ strategy put the fund at risk for a huge failure, which began last summer when the subprime lending credit crisis rocked Wall Street.

“The failure of this fund demonstrates the domino effect that the subprime lending credit crisis has had on investors who thought that they were buying an income generating investment with little risk to their principal,” Shine said. “Clearly the Schwab YieldPlus example shows how average investors who thought their money was safe have taken enormous hits to their nest eggs on a bond mutual fund that was sold as ‘an alternative for your cash.’”

The claim alleges that Schwab failed to disclose to investors the liquidity risks associated with asset and mortgage-backed securities.

A key component of the claim, filed on behalf of an investor from Vero Beach, Fla., was the fact that Daifotis sold 2.9 million shares of the YieldPlus Fund between Jan. 31, 2008 and April 1, 2008 on behalf of other Schwab mutual funds. The YieldPlus Fund’s stock value dropped from $8.93 per share to $6.98 per share during that time, a 21.8 percent decline. At the same time, Schwab’s portfolio managers and the company’s web site encouraged investors to hold their shares of the YieldPlus Fund, according to the arbitration claim filed with FINRA (Financial Industry Regulatory Authority.)

Shine, who spent 7 1/2 years as an enforcement attorney with the Securities and Exchange Commission in Washington, D.C, is in private practice in Melbourne, Fla. He is investigating this and other subprime claims on behalf of investors along with Vernon Healy, a Naples, Fla. based law firm that represents investors throughout the United States. Although class action lawsuits have been filed against Schwab, investors may want to pursue individual claims.

For more information, contact:

Thomas F. Shine, attorney at law
www.thomasfshinelaw.com
www.thomasfshinelawblog.com
1-321-724-4445
1-800-838-8320
TFShine@aol.com

or

Christopher T. Vernon, attorney at law
www.vernonhealy.com
www.protectinginvestors.com
1-239-649-5390
1-877-649-5394 (toll free)
cvernon@vernonhealy.com

Schwab YieldPlus Funds Drain Millions from Retirees' Nest Eggs

Charles Schwab advertised the Schwab YieldPlus funds to investors as “a safe alternative to money market funds that preserve principal while being designed with your income needs in mind.” The firm said the investment would deliver income higher than money market accounts but with minimal price changes; i.e., losses. 

This was a wonderful pitch to retirees. Too bad it wasn’t true with respect to the Schwab YieldPlus funds. Retirees have lost millions of dollars in these funds that were backed by risky products, including risky mortgage products.

The funds of concern to investors include the Schwab YieldPlus Investor Fund (SWYPX) and the Schwab YieldPlus Select Fund (SWYSX). These YieldPlus funds have suffered significant losses in recent months and, due to the circumstances surrounding the price drop (i.e., the sale of assets at depressed prices), it appears unlikely that these losses can be reversed. While the losses are unlikely to be unwound, it is certainly possible that these funds may continue to lose value.

This decline—especially in light of the fact that it appears to be permanent—has come as a shock to investors who were led to believe that this was a safe investment.

Schwab promoted these mutual funds as safe investments containing ultra-short fixed-income securities with little exposure to interest rate and credit risks. Effectively, these mutual funds were marketed as an alternative to money market funds; in reality, 40 to 50 percent or more of the funds’ assets were backed or collateralized by risky and volatile Collateralized Debt Obligations (“CDOs”), including CMOs (Collateralized Mortgage Obligations), or what Wall Street types refer to as “Structured Products.”

Not only were many investors misled by stockbrokers and other financial advisors about the risks of investing in these Schwab Funds, but it appears that the Schwab Funds’ registration statements and offering documents understated the funds’ lack of diversification (which reduces risks) and the extent to which the funds invested in subprime-backed securities and other inappropriate securities (which increases risks).

It now appears that the offering documents inaccurately portrayed the liquidity of the portfolio, the duration of the investments in the portfolio, and the internal controls that should have protected the investors from this situation. 

Although some other funds, such as the Fidelity Ultra-Short Bond Fund and SSgA Yield Plus from State Street Global Advisors have suffered losses, the Schwab YieldPlus Funds’ losses have been most dramatic. For example, the 138 mutual funds in the ultra-short bond fund category averaged a 2 percent decline during the first quarter of 2008. The Schwab YieldPlus Funds dropped 20 percent during that same time, the worst performance in their category. The drastic underperformance of the Schwab YieldPlus Funds compared to their peers reveals, in part, the inappropriate investment risks taken by Schwab and its own investment managers.

Triers of fact are beginning to tire of hearing brokerage firms claim every few years that unprecedented market events caused losses rather than incompetence or wrongdoing by investment professionals. Given the response of the brokerage firms to client losses, the question becomes: Why does an investor need an investment firm and investment professional if they have no ability to deal with volatile or bear markets?

Investors who have been misled do have rights. Class action lawsuits have been filed over the damages caused to investors in these Schwab Funds. The benefit of a class action is that it may provide an avenue for someone to recover who invested a small amount of money. However, investors who have lost a significant amount of money in these Schwab funds may be better served by pursuing an individual claim or small group claim through an attorney who regularly represents individual investors on a contingent fee. 

Our firm, Vernon Healy, currently has claims pending in state and federal court as well as arbitration (FINRA arbitration, formerly known as NASD arbitration) and is currently investigating options on behalf of investors who have lost significant sums investing in the Schwab YieldPlus Fund.  

Email: cvernon@vernonhealy.com