Schwab Pays $119 Million To Put YieldPlus Debacle Behind It

Wednesday, January 12, 2011 02:04
Schwab Pays $119 Million To Put YieldPlus Debacle Behind It

Charles Schwab has apologized for advertising its YieldPlus fund -- which invested in an array of toxic mortgage-backed securities -- as "a smart alternative for your cash," but a $119 million settlement will not be enough to protect the executives at the center of the scandal.

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Schwab took an interestingly "nuanced" approach in what amounts to its corporate apology by simply saying it "regrets" that investors lost money when YieldPlus cratered in the credit crisis, losing 86% of its value in 2007 through 2008. 


As the company points out, the fund did very well until the credit crunch, and besides, founder Chuck Schwab himself was so taken in by the YieldPlus proposition that he was one of the biggest -- and most deeply hurt, from a financial perspective -- investors in the fund.


However, disgruntled shareholders note that someone at Schwab trained agents to sell the fund as the equivalent of a money market fund and that when things went sour, the company begged them to stay the course even while it was pulling YieldPlus allocations out of its other funds.


And as Schwab acknowledges in its statement, two high-level executives -- Kimon Daifotis, ex-CIO, fixed income and Randall Merk, current executive vice president -- are currently the subject of a separate SEC investigation into whether the company's YieldPlus sales practices constituted fraud.


It remains to be seen whether this will impair confidence in the rest of Schwab's fund complex.






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