Charles Schwab is offering settlements to investors in its supposedly conservative Schwab YieldPlus Fund, which is down 26 percent this year. This settlement is pennies on the dollar for the losses suffered by some investors, who are now seeking a class action against Schwab.
YieldPlus, an ultra-short bond fund that offered high yields, attracted many investors and had more than $13 billion in assets at its peak last year. But the fund was stuffed with mortgage-related securities, and when the subprime-mortgage crisis hit last summer, the fund began its meltdown. Investors have been scrambling to get out and the fund's assets are now down to $1.5 billion.
Typically, fund companies repaid investors with losses in money-market funds. However, YieldPlus was not a money-market fund; instead, it sold itself as a conservative investment to clients looking for a slightly higher yield while preserving their capital.
Schwab's payouts are reported to be about one to twelve cents (or more in some cases) for each dollar lost. Investors who take these settlement offers will not be able to join in on any litigation against YieldPlus which could mean a quick exit for Schwab on a really big case against them.
Several suits against YieldPlus are seeking class-action status in New York, Massachusetts, and California. Disputes with brokerage firms usually require arbitration but the plaintiffs' attorneys say this doesn't apply to their case because Schwab did not adequately disclose the risks of the fund.
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