Schwab YieldPlus Funds: Did Schwab Mislead Investors by Claiming Losses Must be Offset by Interest Earned?


Over the past several months we at Shepherd Smith Edwards & Kantas LTD LLP have spoken hundreds of Schwab YieldPlus investors from throughout the United States.  Schwab representatives have told many that if they seek to recover losses any such loss would automatically be offset by the interest they earned over the years.  This is not true!  There is no SEC or FINRA (formerly the NASD) rule mandating such an offset, nor do we believe the law would support Schwab’s position.

Schwab’s attorneys may argue that the firm should receive an offset for the interest the investors earned.  We believe Schwab’s attorneys should lose such an argument in arbitration. For example, Schwab would claim:   The investor invested in a Yield Plus fund for approximately 2 years.  During this time, the investor earned approximately $50,000 in interest.  Recently, you have suffered a principal loss of $100,000, therefore your true losses are $50,000, not $100,000.

This argument makes no sense and states’ Model Securities Act disagrees with it.  By analogy, this argument would be the same as saying to a bank that because I borrowed $30,000 on a five year note with interest, and over the past three years paid $30,000 to the bank, that now I do not owe them any more money.  Of course the bank would find this assertion absurd.

YieldPlus investors were seeking safety of principal, plus a modest return.  That was the concept and that was exactly how Schwab advertised the funds.  Specifically, Schwab repeatedly stated that the objective of the YieldPlus funds was to provide “current income consistent with minimal changes in share price.”  See March 31, 2008 YieldPlus Flier.

Investors do not get into ultra short term fixed income funds, such as the YieldPlus Funds, for any other reason than safety of principal, and collection of a modest return.  As a result, it is our strong belief that if it is determined that Schwab is liable to an investor, it is unlikely the loss of principal in the investment would be offset by earned interest.

Judges over the years have routinely rejected arguments for offsetting capital losses for income received, as shown by the following representative cases:

The judge in Kane v. Shearson Lehman Hutton, 916 F. 2d 643, 644 (11th Cir. 1990 ) stated 'If the . . . methodology espoused by [Shearson] were adopted, it could serve as a license for broker-dealers to defraud their customers with impunity up to the point where losses equal prior gains.'

In Hughes v. J.P. Morgan, U.S. Dist. Ct. LEXIS 11497 (S.D.N.Y., 2004) the Court agreed with plaintiff’s assertion that defendant’s calculation of damages, which netted income from an account against principal losses, was an attempt at “exoneration by historical performance.”

The appeals court in Nesbit v. McNeil and Black & Company, Inc., 896 F.2d 380 (9th Cir. 1990), affirmed the district court's judgment on a jury verdict and stating, ‘[T]here is no reason to find that [plaintiffs] should be denied a recovery because their portfolio increased in value, either because or in spite of the activities of the defendants’. 





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