SAN FRANCISCO, Feb. 12, 2009 (GLOBE NEWSWIRE) -- Clients of Charles Schwab continue to seek redress from the brokerage firm for improper marketing of the YieldPlus related products. Several more claims have been filed recently against the brokerage firm by securities arbitration specialists Shepherd Smith Edwards & Kantas LLP (http://www.sseklaw.com/). As alleged in the claims filed, Schwab had represented to the public and actively marketed the YieldPlus funds as a safe alternative to a money market account. Specifically, Schwab said the funds were a safe alternative to money market funds that preserve principal "while being designed with your income needs in mind." In fact, as late as November 17, 2007, the Prospectus for the YieldPlus funds stated, "[t]he fund's investment strategy is designed to offer higher yields than a money market fund while seeking minimal changes in share price."
Essentially, as alleged in the claims filed, Schwab represented that the funds would have the general characteristics of money market funds, meaning little to no risk or volatility, but with higher returns. In fact, Schwab specifically stated in its marketing materials that the short duration and high ratings of the underlying investments would minimize fluctuations in the YieldPlus funds' share price. During its early years, the YieldPlus funds underperformed their benchmark. As a result of that underperformance, the YieldPlus managers began to look for alternative investments. Eventually, Schwab started to invest the YieldPlus funds in collateralized bond obligations ("CDOs"), collateralized loan obligations ("CLOs"), and collateralized mortgage obligations ("CMOs"), collectively sometimes referred to collateralized debt obligations ("CDOs") or structured financial instruments. These investments carried a large degree of risk, long durations, and were not tested through market cycles, making them completely unpredictable. Moreover, these securities were and are thinly traded, illiquid and often difficult to value.
As alleged in the claims filed, in order to continue to obtain returns that exceeded other conservative bond funds in the same class, Schwab invested an ever-increasing portion of the assets for the YieldPlus funds in risky mortgage backed and other structured products, completely failing to diversify the funds. Over time, that meant that over half of the YieldPlus funds were invested in these speculative investments. In fact, according to the Schwab YieldPlus funds certified shareholder report dated August 31, 2007, 45.9% of the net assets in the YieldPlus funds were invested in mortgage backed securities with another 8.8% in other asset-backed securities. As a result, a huge amount of these funds were placed at great risk, contrary to the marketing of them as cash or money market alternatives.
This risky strategy, as alleged in the claims filed, eventually caught up with Schwab. In the latter part of 2007 and continuing through 2008, the YieldPlus funds fell sharply. In March 2007 alone, the YieldPlus funds dropped roughly 10%, despite Schwab's ongoing representation that the funds are as safe as cash. Unbelievably, and with the full knowledge of the enormous losses already incurred and the worse news on the way, Schwab continued even at the end of March to represent that, "This fund seeks high current income consistent with minimal changes in share price." See March 31, 2008 YieldPlus Flier. Through the first half of 2008, the YieldPlus funds were down roughly 30%, in stark contrast to the positive returns of a money market funds and most ultra-short bond funds. Remarkably, the net asset value of the funds fell below $450 million, from a high point of almost $13.5 billion.
Ultimately, Schwab's YieldPlus funds were far from a conservative, money market alternative. In reality, the funds were high risk, in complete contradiction to how the funds were consistently advertised. Shepherd Smith Edwards & Kantas LLP has a team of attorneys, consultants and others with more than 100 years of combined experience in the securities industry and in securities law. Since 1990, we have represented over one thousand investors nationwide to recover losses. Our focus is on broker fraud and broker negligence. We have represented clients in Federal and state courts and in arbitration through the Financial Industry Regulatory Authority (FINRA), the New York Stock Exchange Inc. (NYSE), the American Arbitration Association (AAA) and in private arbitration actions.
http://www.yieldplus-fraud.com/
Contact: Shepherd Smith Edwards & Kantas LLP Kirk Smith, ksmith@sseklaw.com, Samuel Edwards, sedwards@sseklaw.com, 800-259-9010