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Schwab YieldPlus Investment Losses

Some question Schwab reparation for losses of YieldPlus investors: custody giant is ignoring clients of RIAs, critics contend.

Investment NewsMay 5, 2008 (Brooke Southall)

The Charles Schwab Corp. is choosing the least sophisticated investors among those who lost money in its YieldPlus fund for settlement offers, according to industry sources.

One effect of this approach by the San Francisco-based broker is that the clients of registered investment advisers who invested in this ultra-short-term bond fund aren’t getting settlement offers, they said.

Nor should RIAs expect their clients to receive offers anytime soon, said Reed Kathrein, a Berkeley, Calif.-based partner with Hagens Berman Sobol Shapiro LLP of Seattle. He filed a class action on behalf of investors who suffered losses in the Schwab YieldPlus Fund (SWYPX).

“Schwab is telling advisers they should have known better because they were sophisticated investors,” Mr. Kathrein said.

Norman Boone, president of Mosaic Financial Partners Inc. of San Francisco, had many of his clients invested in YieldPlus, and none of them was called by Schwab, to the best of his knowledge.

“We have not heard from clients that Schwab is making them offers,” he said.

It makes sense that Schwab would steer clear of RIA clients, said attorney and investor advocate Andrew Stoltmann, who runs Stoltmann Law Offices PC of Chicago.

“It’s clear that Schwab is cherry-picking out certain people – people it has the most liability to,” he said.

Schwab issued a prepared statement saying: “Our standard practice is to review and evaluate any complaints we may receive from customers based on the specific facts and circumstances of each customer’s complaint, regardless of which product or transaction is involved. We have not been proactively calling YieldPlus shareholders to persuade them to enter into settlements or to not join the class.”

According to Mr. Kathrein, “They’re trying to buy off the claims cheap. They would get hit with punitive damages, especially for the elderly and that kind” of investor.”

Yet it can also be argued that Schwab’s outreach to its most vulnerable investors is laudable, said Mr. Boone, whose practice manages about $350 million.

“It seems like Schwab is saying: ‘We screwed up, and we’re trying to [make amends],'” he said. “To some extent, that’s honorable.”

The net asset value of a YieldPlus share fell to $6.59 April 30, from $9.50 last August – a decline of 30.6%. The fund’s assets dropped to $2.5 billion as of March 20, from $13 billion last May.

What isn’t honorable, the lawyers said, is that Schwab’s callers introduced themselves as being from a Schwab “client advocacy group” and then urged the clients to accept its offers without telling them that they may have legal options.

The settlement contract, however, does contain language that indicates the client’s legal options, Mr. Stoltmann said.

In addition, Schwab’s offer presentation applies pressure by offering 5 cents to 12 cents on the dollar with a five-day deadline to make a decision, he said.

The callers also use questionable arguments, Mr. Stoltmann said. One line of argument from Schwab’s client advocacy group holds that the losses aren’t as big as they appear. Interest payments realized over the years of holding the bond fund need to be figured in.

“They’re trying to use the interest as an offset,” Mr. Stoltmann said.

But the Schwab callers are also faulting the clients for not mitigating their own damages, he said.

“They are saying, ‘As soon as this fund started falling, you should have sold it immediately,'” said Mr. Stoltmann, who said he has spoken to about 100 YieldPlus investors and has filed for Financial Industry Regulatory Authority Inc. arbitration for three of them, with average losses of about $30,000. Finra is based in New York and Washington.

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I hired Joe and his firm Stoltmann Law office to represent me in a case where my investment guy had lost a substantial amount of money in my account. He invested in some very speculative energy stocks which should not have been in my portfolio due to my request for a very conservative investment portfolio. I was very impressed and satisfied with the representation and negotiations on my behalf by Joe and Stoltmann Law offices and I would definitely recommend them to anyone who would be in need of a very fine firm. Anonymous
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