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Schwab faces millions in claims over YieldPlus

10/19/2008

Investment News

The Charles Schwab Corp. could be liable for millions in investors’ claims over losses to a short-term-bond fund that blew up this year because of its exposure to mortgage-backed securities.

At its peak in May 2007, the Schwab YieldPlus Fund had more than $13 billion in assets.

From that point through Oct. 10, the fund lost more than 30% of its value and saw its assets drop 95% to $432 million.

One recent arbitration award for an investor in a claim against Schwab may be a bellwether for other cases, according to attorneys handling investors’ claims in the matter.

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 – prior to his purchase of the YieldPlus Fund – by not disclosing its exposure to the subprime-mortgage market and the fact that it is a proprietary fund.

“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 half a dozen investors have contacted him recently about YieldPlus.

Back-of-the-envelope math translates into potentially steep claims against Schwab, plaintiff’s attorneys said.

And the attorneys like their chances. The YieldPlus claims are “among the best product cases I’ve seen in the past 10 years,” said Ryan Bakhtiari, a partner with Aidikoff Uhl & Bakhtiari of Beverly Hills, Calif.

The compelling reason is the profile of investors who bought the fund, he said. Typically, they were seeking protection of their investment principal, were retired and living on a fixed income, Mr. Bakhtiari said.

“Many had [certificates of deposit] and were convinced by a Schwab rep that the YieldPlus was as safe as a CD,” he said.

Mr. Bakhtiari has filed between 50 and 75 claims against Schwab over the fund and has other claims in various stages.

So far, the claims he has filed total $10 million, with another $5 million to $10 million in the pipeline, he said.

The claims range between $10,000 and $2 million, Mr. Bakhtiari said.

“I think it’s a sign of things to come for Charles Schwab,” he said.

Mr. Bakhtiari added that he has spoken to former Schwab employees, as well as advisers who keep assets under custody at Schwab Institutional of San Francisco, who are upset over the matter. “They’re sending us clients,” he said.

YieldPlus is an ultrashort-bond fund that offered yields about half a percentage point higher than such investments as CDs.

Along with the arbitration claims, a potential class action over the YieldPlus Fund is also making its way through the courts, observers noted.

Industry attorneys, however, noted that, despite the investor’s recent win, plaintiff’s lawyers have a difficult road ahead with the spate of claims over the YieldPlus Fund. Finra arbitration decisions set no precedents. and each claim is decided on its merits.

Schwab doesn’t “like to comment about pending litigation,” said David Weiskopf, a spokesman for the firm, who added that it will “continue to vigorously defend” itself in all cases.

Mr. Bakhtiari noted that Schwab may have its hands full as more claims go to arbitration.

It usually takes a claim about a year to work its way through the Finra system and be heard by arbitrators, he said. Since the YieldPlus Fund saw its drop this spring, arbitrators could hear many claims beginning in April.


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