Angry Schwab bond-fund customers win in court

cnn ^ | April 10, 2010 | Lisa Gibbs

[george76]

Charles Schwab lost a big court decision last week in a case that has significance for investors in mutual funds. A federal judge ruled that Schwab violated the law when its YieldPlus (SWYSX) ultra-short bond fund failed to get shareholder approval before loading up on mortgage-backed securities. When the market for those securities collapsed, the fund lost 36% — a nasty surprise for investors who believed that YieldPlus was a safe alternative to cash. Left to decide is the amount of damages the investors should receive; lawyers say California investors alone lost about $170 million, the rest about $800 million.

During the 2000s, according to the complaint at the center of the recent case, Schwab marketed YieldPlus as offering “good returns with low principal risk,” listing the fund as an option for investors’ cash allocation in their portfolios. Yet, the plaintiffs claim, YieldPlus loaded up on mortgage-backed securities that were much riskier than its marketing materials conveyed, allocating as much as half of its assets to MBSs in early 2008. The complaint further alleges that Schwab trained its customer representatives to recommend customers transfer assets to YieldPlus from money market funds, and that Schwab's compensation structure made it financially beneficial for them to do so. (The company's compensation system paid more for assets held in mutual funds than in CDs, for example.)

in a decision issued last week, U.S. District Judge William Alsup sided with investors against Schwab, ruling that the fund's MBS investments represented a reversal of the fund's diversification policy that needed a shareholder vote for approval. “This is not a disclosure question," the judge wrote. "It is a governance question.”

[A CA Guy]

Up the court chain IMO.

[Rockingham]

Schwab is in a difficult position, risking not just a substantial monetary loss but also damage to its reputation.

[george76]

Job security and big fees for many lawyers ?

[Liz]

SCAM-A-RAMA

Loan Originator: Option One (Owned by H&R Block, loans pooled as Merrill Lynch Asset Backed Securities HE2-2007).

Option One ($54B Loans & Servicing) sold to American Home Mortgage Servicing, Inc. (AHMSI), for $1.4B (WL Ross & Co, AKA Inestco Huge TARP recipient) in 2008, so an orig. $735K, was sold for $19K.

Hired an attorney to fight foreclosure, even though they agreed not to foreclose for 60 days, they foreclosed anyway. They sold the home to themselves for $357K under the name CitiBank N.A.(their Trustee on the Pooling & Service agreement and FWP).

This is illegal because the home must be sold to a bonafide purchaser in Calif. This move reduces their property tax bill immediately.

But Option One purchased PMI Mortgage insurance on our loan without disclosing it to us, it was not on our HUD-1 as required by law.

Option One illegally purchased Radian PMI Mortgage insurance to cover 60% of the loan value.