The Charles Schwab Corp. short-term-bond fund that blew up
this year because of its exposure to mortgage-backed securities is now costing the firm as a result of significant legal losses.
On Oct. 2, an arbitration panel of the Financial Industry Regulatory Authority Inc. of New York and Washington ruled that San Francisco-based Schwab and one of its representatives were liable for $542,340 in an investor claim against them.
The investor, Jeffrey Nielson, alleged that Schwab and the rep, Darin Beckering, duped him when he bought the Schwab YieldPlus Fund by not disclosing its exposure to the subprime-mortgage market and the fact that it was a proprietary fund.
YieldPlus is an ultrashort-bond fund that offered high yields.
At its peak last year, it had more than $13 billion in assets.
On Friday, the fund had $432 million in assets.
There are many individual arbitration claims as well as class actions against Schwab due to the fund, which has dropped more than 30% for the year.
“This arbitration award may in fact be significant,” said Jacob H. Zamansky, an attorney in New York who represents investors in securities arbitration claims.
He said that a half dozen investors have contacted him recently about the YieldPlus fund.
Schwab recorded a $16 million charge this year for “individual client complaints and arbitration claims” stemming from the YieldPlus Fund.
A search of the Finra arbitration award database showed that Schwab had lost one other claim this year over the YieldPlus Fund, but that was a much smaller award of $18,425.
A Schwab spokesman, Michael Cianfrocca, didn’t immediately return a phone call seeking comment.
