Charles Schwab has agreed to pay $118.9 million to settle federal regulators’ civil charges over disclosure of the risks the “YieldPlus Fund” of a short-term bond fund. The Securities and Exchange Commission announced the settlement with two Schwab units, Charles Schwab Investment Management and Charles Schwab & Co. According to the agency, 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 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. It is alleged in the suit that they committed fraud and other securities law violations in the offer and sale of the YieldPlus Fund. 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.
The assets of the fund fell 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 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% 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.
Source: USA Today
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