Facing hundreds of arbitration claims and class-action lawsuits over huge losses in two ultra-short bond funds known as the Schwab YieldPlus Fund (SWYPX) and the Schwab YieldPlus Select Fund (SWYSX), Charles Schwab & Co. may want to rethink its “Talk to Chuck” advertising slogan. The funds have become a financial disaster for investors, who say the San Francisco-based investment firm marketed and sold the YieldPlus funds as relatively conservative investments whose risk levels were on par to that of money-market funds.
Instead, the funds (collectively referred to as the Schwab YieldPlus Fund) were over-concentrated in high-risk, illiquid mortgage-backed securities. Following the collapse of the subprime mortgage market, this overconcentration in speculative investments resulted in massive losses of more than $1.3 billion. In total, the Schwab YieldPlus Fund lost a staggering 33.7% of its value last year. By comparison, the average ultra-short bond fund fell 1.9%.
To no one’s surprise, the Schwab YieldPlus Fund ranked dead last out of 50 ultra-short bond funds tracked by Morningstar, Inc. in 2008.
YieldPlus investors across the country have since filed hundreds of arbitration complaints with the Financial Industry Regulatory Authority against Charles Schwab, charging the company of intentionally withholding important details about the portfolio diversification of the Schwab YieldPlus Fund and the fact that a large portion of the fund’s assets had been placed in high-risk subprime mortgage holdings.
Investors also claim Charles Schwab created misleading marketing materials to falsely tout the supposed investing safety of the YieldPlus Fund – information that was reiterated in public statements made fund managers. Financial prospectuses give further credence to investors’ claims, with information stating the fund’s investing objective as one of seeking high current income with minimal changes in share price.
FINRA arbitration panels continue to review claims against Charles Schwab for investors’ losses in the Schwab YieldPlus Fund. In one decision, FINRA awarded more than $500,000, or about 81%, of the investor’s claimed damages. Other FINRA claims have yielded awards totaling 100% of the damages claimed by investors.