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Rating:Schwab Scuttles the $235M YieldPlus Settlements Not Rated 0.0 Email Routing List Email & Route  Print Print
Tuesday, November 09, 2010

Schwab Scuttles the $235M YieldPlus Settlements

News summary by MFWire's editors

The fight over the Schwab YieldPlus Fund [see profile] is returning to court. Yesterday the San Francisco-based brokerage giant confirmed that it is pulling out of two settlement agreements, totaling $235 million. Schwab claims that the plaintiffs effectively reneged on the settlement agreements by claiming that they still "have the right to sue on behalf of non-California class members" jeopardizes the whole point of the settlement for Schwab, ending the litigation.

Lead plaintiffs' attorney Steve Berman told the San Francisco Chronicle's Kathleen Pender that there will be a hearing on November 18 about Schwab pulling out of the settlements. For his part, Berman says the plaintiffs are standing their ground.

"We intend to ask the court to hold Schwab in contempt for their effort to rewrite a deal they negotiated and signed," Berman stated.

In the spring the two sides agreed to $200 million and $35 million deals to settle claims under federal and California law, respectively (see The MFWire, 4/20/2010 and 5/6/2010). The litigation stems from the 2007-2008 collapse of YieldPlus, an ultra-short-term bond fund, thanks to its investments in mortgage-related securities.

The Los Angeles Times' Walter Hamilton and Nathaniel Popper also covered Schwab's move.

Company Press Release

SAN FRANCISCO-- Charles Schwab Investment Management and Charles Schwab & Co., Inc. today notified counsel for the plaintiffs in a consolidated class action lawsuit relating to the Schwab YieldPlus FundŽ that Schwab is invoking the termination provisions of the settlement agreements in those actions. Schwab has also filed with the court a notice of withdrawal from the original motions filed jointly by plaintiffs and defendants for final approval of the settlements. At this time, plaintiffs continue to support the original motion for final approval, which remains pending and subject to a hearing scheduled for mid-December. The Charles Schwab Corporation provided the following additional comments:

In the spring of 2010 after a lengthy and cooperative negotiation with Plaintiffs' lawyers, Schwab agreed to a substantial settlement of $235 million to settle all claims in the Yield Plus class action proceedings, regardless of their merit. Schwab was fully prepared to contest the allegations at trial but wanted to provide significant and speedy financial benefit to valued clients who purchased or held the fund during the period covered by the lawsuit and to put the matter behind us. Plaintiffs' lawyers had praised the settlement as one in which clients would receive "real money" and "a high percentage of recovery."

Plaintiffs' recent assertions, that they continue to have the right to sue on behalf of non-California class members, means that none of the parties will receive the benefit of the agreement originally negotiated. As a result, Schwab has determined its only option is to withdraw from the settlement and litigate the case rather than subject the company and its shareholders to yet more litigation over the same issues. Schwab worked hard to settle this case for the benefit of its clients and shareholders and thought it had accomplished that goal. Schwab agreed to a generous settlement, but only in return for an end to all litigation over the facts and claims alleged in the consolidated complaints. Now that Plaintiffs have asserted that Schwab is not entitled to the primary benefit Schwab was to receive under the settlement, Schwab has no choice but to withdraw from the joint motions for final approval.

We look forward to a fair and complete hearing of the facts of this matter in court where it will be clear that the decline of the YieldPlus fund was caused by the credit crisis and unprecedented housing market collapse of 2007-2008, not by any Schwab wrongdoing.

Until the credit crisis, the YieldPlus Fund was consistently one of the best performing funds in its category for eight years and held a Morningstar 5-star rating from December 2004 through September 2007. Even in the face of the credit crisis, YieldPlus shareholders lost, on average, only 7.5 percent of their investment when dividends are counted. Schwab looks forward to the opportunity to prove at trial that the mortgage-backed securities investments challenged by the plaintiffs, far from being the cause of harm to fund investors, performed comparably and potentially better than alternative investments such as corporate bonds and asset-backed securities, during the credit crisis.

Schwab regrets that fund shareholders lost money in the fund during the credit crisis and housing market collapse. Indeed, Charles R. Schwab, the company's founder and chairman, was the largest individual shareholder of the fund and also suffered losses. Unfortunately, the recent assertions made by plaintiffs' counsel have forced us to terminate the settlement, thereby prolonging the litigation. Under the circumstances termination is the only viable option for the company and our shareholders.

About Charles Schwab

The Charles Schwab Corporation (NYSE:SCHW) is a leading provider of financial services, with more than 300 offices and 7.9 million client brokerage accounts, 1.5 million corporate retirement plan participants, 665,000 banking accounts, and $1.47 trillion in client assets. Through its operating subsidiaries, the company provides a full range of securities brokerage, banking, money management and financial advisory services to individual investors and independent investment advisors. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC, www.sipc.org), and affiliates offer a complete range of investment services and products including an extensive selection of mutual funds; financial planning and investment advice; retirement plan and equity compensation plan services; referrals to independent fee-based investment advisors; and custodial, operational and trading support for independent, fee-based investment advisors through its Advisor Services division. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides banking and mortgage services and products. More information is available at www.schwab.com and www.aboutschwab.com. 

Edited by: Neil Anderson, Managing Editor

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