Another settlement has come out of the fracas surrounding the 2007-2008 collapse of the Charles Schwab YieldPlus Fund.
Under the terms of the most recent settlement, Randall Merc, a former president at Schwab, admitted no wrongdoing, but agreed to pay a $150,000 fine and serve a one year suspension.
This is only the latest in a string of settlements connected with the Fund. Previously, Schwab settled with the SEC for $118.9 million and settled an investor class action for $235 million. Additionally, many investors opted out of the class action lawsuit in order to pursue individual arbitrations against Schwab. Many of those arbitrations have ended in settlement as well, including those handled by our firm.
The Schwab YieldPlus Fund was an ultra-short bond fund that was marketed to investors who "seek high current income with minimal changes in share price." It was described as being only "slightly" or "marginally" more risky than a mutual fund. However, the Fund was invested heavily in mortgage backed securities.
When the real estate market began to falter in 2007-2008, the Fund began to drop in value. Other Schwab funds that were invested in the YieldPlus began to pull out, accelerating the decline. This was followed by a mass departure of investors and, thus, an even more precipitous decline in value.
The stock chart best sums up the carnage that followed:
Schwab has argued that the Fund was simply a victim of the "unforeseeable credit crisis and market collapse." The SEC and private litigation, however, allege that the Fund had misled investors as to the risks surrounding the Fund and had over invested in mortgage backed securities without the appropriate shareholder approval to do so.
Though this case has settled, more are still pending against other Schwab executives. Will we see the settlement trend continue until this matter is finally resolved? Stay tuned.