Online brokerage also facing a welter of arbitration claims over bond fund implosion
The Charles Schwab Corp. faces 194 individual arbitration claims seeking $34 million in damages over its YieldPlus bond fund, the company disclosed today in an earnings release. Moreover, Schwab said plaintiffs in class-action suits over the fund are seeking as much as $890 million in damages.
YieldPlus, a short-term-bond fund, was marketed as a safe alternative to cash, but its large holdings in mortgage-backed securities caused it to blow up in the wake of the credit crisis.
Schwab also said that it had accrued an $11 million charge in connection with an adverse ruling late last month in pending class action litigation.
In a summary judgment, a federal judge in California said that Schwab should have gotten approval from fund shareholders before moving half the fund's assets into mortgage-backed bonds.
That ruling allowed three classes of plaintiffs to proceed with their cases. Schwab said the plaintiffs are seeking up to nearly $900 million in damages.
A trial date is set for May 10 for two classes of plaintiffs.
The company “continues to believe it has strong defenses [against the class actions], especially in view of the global credit crisis,” Schwab said in the earnings release. “Market valuations and illiquidity were not limited to mortgage-backed securities, and impacted other asset classes held by the [YieldPlus fund] to the same or an even greater extent.”
Furthermore, the bond fund's holdings in mortgage-backed securities were widely disclosed, Schwab said in the release.
Schwab also said that it has been in discussions with the Securities and Exchange Commission regarding settlement of a YieldPlus case that the agency has threatened to file.
Last fall, Schwab disclosed that the SEC had issued a “Wells notice” against the firm, indicating that the commission might file formal charges.
The SEC has yet to charge the company, said Greg Gable, a Schwab spokesman.
“The company is unable to predict whether [there will be] a settlement with the SEC or with other regulators who are investigating these matters,” Schwab said in its release.
