Schwab Units To Pay $11.9M Over Alleged Misleading Statements
WASHINGTON (AP) — Two units of Charles Schwab Corp. on Tuesday agreed to pay a total $118.9 million to settle federal regulators’ civil charges of making misleading statements about the risks of a short-term bond fund. Company founder and chairman Charles Schwab himself lost money as one of the biggest investors in the fund, the company said.
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 Charles Schwab Investment Management and Charles Schwab & Co. Inc. related to the fund. 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.
“Schwab would never seek to profit at the expense of its clients,” the company said in a statement. “We regret that fund shareholders lost money in YieldPlus.”
The SEC also filed related charges against a Schwab executive and a former company official. Those charges are pending.
The company said it expects to take an after-tax charge of $97 million against its fourth-quarter earnings 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.
The $118.9 million being paid under the settlement includes about $52.3 million in restitution of fees, about $57 million in fines and $9.3 million in interest.
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