By Marcy Gordon
AP Business Writer
WASHINGTON (AP) -- Charles Schwab Corp. on Tuesday agreed to pay $118.9 million to settle regulators' civil charges over disclosure of the risks of a short-term bond fund.
The company called the steep decline of the YieldPlus Fund the result "of an unprecedented and unforeseeable credit crisis and market collapse" in 2007 and 2008.
The Securities and Exchange Commission announced the settlement with two Schwab units, Charles Schwab Investment Management and Charles Schwab & Co. Inc. The agency said Schwab marketed the fund as a conservative investment only slightly riskier than a money-market fund even though half its assets were invested in high-risk securities.
The Schwab units neither admitted nor denied the allegations in the settlement with the SEC, the Financial Industry Regulatory Authority -- the securities industry's self-policing organization -- and Illinois regulators.
Company founder and Chairman Charles Schwab lost money himself as one of the biggest investors in the YieldPlus Fund, according to the company.
"Schwab would never seek to profit at the expense of its clients," the San Francisco-based company said in a statement. "We regret that fund shareholders lost money in YieldPlus."
The SEC also filed a civil lawsuit against Kimon Daifotis, former chief investment officer for fixed income at Charles Schwab Investment Management, and Randall Merk, an executive vice president of Charles Schwab & Co. who was a trustee of YieldPlus and other Schwab funds. The suit alleges they committed fraud and other securities law violations in the offer and sale of the YieldPlus Fund.
Daifotis and Merk disputed the SEC's allegations and said they would contest them in court.
The company said it expects to take an after-tax charge of $97 million against its earnings for the October-December quarter for the settlement.
Before the credit crisis hit, the YieldPlus Fund was one of the top performing funds in its category for eight years, Schwab said.
Its assets plummeted to $1.8 billion from $13.5 billion during an eight-month period in 2007-2008 as the mortgage-backed and other securities it held lost their value and investors redeemed their shares, the SEC said. The agency said the Schwab units failed to adequately inform investors about the risks of investing in the fund and how different it was from money-market funds.
The SEC also alleged that the fund violated its own policy on concentrations of holdings by investing more than 25 percent of fund assets in mortgage-backed securities.
In addition, the SEC said that Schwab failed to have adequate policies to prevent the misuse of confidential information regarding the YieldPlus Fund. That allowed some funds and people related to Schwab to redeem their own shares in the fund during its decline, according to the SEC. They included Schwab Target Date Funds, which redeemed its shares in March 2008, the SEC said.
The $118.9 million being paid under the settlement includes about $52.3 million in restitution of fees, about $57.3 million in fines and $9.3 million in interest.
Susan Brune, an attorney for Merk, said in a statement her client will fight the SEC's suit. "The SEC's claims are infected by hindsight bias and are not supported by the actual evidence. We look forward to presenting all the facts in court."
Daifotis "denies the SEC claims. He intends to vigorously contest them," said his attorney, David Bayless. "He had no incentive to commit the fraud that the SEC alleges: because he invested in the fund and also saw its value decline, Bayless said.
Published: Thu, Jan 13, 2011
