Skip to Content
Fund Times

Schwab Settles YieldPlus Lawsuit

Plus, Fidelity hires former Treasury official, and more.

Mentioned: , , , , , , , , ,

This week,  Charles Schwab Corporation (SCHW) agreed to pay $200 million to settle a federal class-action lawsuit brought against the firm in 2008 following the implosion of its YieldPlus fund. Schwab settled the litigation without admitting liability. As a result of the settlement, the firm has to restate first-quarter earnings, which were announced last week. Net income, which was $119 million, will be reduced by about $105 million. Schwab noted that this agreement doesn't resolve plaintiff's state law claims or other pending regulatory matters.

YieldPlus was an ultrashort-bond fund, a type of investment that aims to provide a little more return with a little more risk than a money market fund. The extra risk was supposed to be minimal, but the fund under manager Kimon Daifotis owned bigger stakes in nonagency mortgage- and asset-backed bonds (including some backed by subprime loans) than its typical peer. The market hammered this fund from mid-2007 to 2008, when the market punished bonds with even a hint of risk. Shareholders began running for the door when the fund's performance started to suffer, compounding the problem by forcing it to sell its holdings at depressed prices to meet redemptions. The fund lost 3.6% in the second half of 2007 before plummeting 35% in 2008. Assets dropped from a June 2007 high of $13.5 billion to $6.5 billion by the start of 2008, and shrunk to $524 million by the end of July 2008.

Courtney Goethals Dobrow does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.