The Charles Schwab Corp. will pay $119 million to settle U.S. regulatory claims that the San Francisco-based brokerage misled investors in its YieldPlus Fund and changed investment strategy without shareholder approval.
The YieldPlus Fund fell to $1.8 billion in assets in 2008 from a peak of $13.5 billion in 2007 after deviating from its stated policy by investing more than 25 percent of fund assets in private-issuer, mortgage-backed securities, the Securities and Exchange Commission said today in a complaint filed at federal court in San Francisco. Schwab executives Kimon Daifotis and Randall Merk committed fraud in offering, selling and managing the fund, the SEC said.
“Schwab marketed the fund as a cash alternative with only slightly more risk than a money-market fund even though, at one point, half of the fund’s assets were invested in private-issuer, mortgage-backed and other securities,” said Antonia Chion, an associate director in the SEC’s enforcement unit.
The company settled the SEC’s claims without admitting or denying wrongdoing. The case against Daifotis and Merk is continuing, said the SEC, which is seeking unspecified fines and disgorgement of any ill-gotten profits from the two men.
Daifotis’s attorney David Bayless, said Daifotis denies the SEC’s allegations and will contest them in court. Daifotis had invested a significant amount of his own money in the YieldPlus Fund, Bayless said. A phone call to Susan Brune, an attorney for Merk, wasn’t immediately returned.
“Schwab has worked closely with these parties to bring this matter to a constructive conclusion, and believes that resolving it in this way is in the best interests of the company, its stockholders, and clients who experienced losses in the YieldPlus Fund as a result of the global financial crisis,” the company said in a statement. “Schwab would never seek to profit at the expense of its own clients.”
The settlement also resolves related claims by the Financial Industry Regulatory Authority and Illinois regulators.
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