Schwab YieldPlus Funds: Were Investors Fooled into Believing Their Funds were Placed in a Money Market Type Fund?

Charles Schwab YieldPlus Funds

The securities law firm of Shepherd Smith Edwards & Kantas LTD LLP ( is currently representing investors in FINRA arbitration claims brought against Charles Schwab & Co., Inc.  These claims relate to various misrepresentations and omissions in mutual funds underwritten by Schwab, including the Schwab YieldPlus Fund Select Shares (SWYSX), Schwab YieldPlus Funds Investor Shares (SWYPX) and Schwab California Tax Free YieldPlus Fund (SWYCX). 

In the complaints it is alleged that the brokerage firm Charles Schwab violated state securities laws and industry regulations over an extended period of time by misleading investors about the underlying risks in the funds including the extent to which the funds were exposed to the volatility, dangers and illiquidity of the sub-prime mortgage market.  The investors also claim these the funds were not diversified in a manner consistent with Schwab’s representations, and were instead over-concentrated in securities tied to the mortgage industry.

The funds have recently experienced significant losses.  For example, the Schwab YieldPlus Fund is down almost 30% since the beginning of the year, significantly worse than comparable short term bond funds which, on average, are down only slightly in the past year.  Thus, the losses in the YieldPlus Fund were apparently not caused by events or circumstances that impacted the entire market.  Rather, such losses were allegedly the result of mismanagement by Schwab’s fund managers when they chose to concentrate the Fund’s portfolio in extraordinarily risky investments. 

It is claimed that Schwab misrepresented material information regarding the funds for many years.  In November 2004, Charles Schwab first offered the Schwab YieldPlus Fund to the investing public representing that the YieldPlus Fund was “a safe alternative to money market funds that preserve principal while being designed with your income needs in mind.”  Schwab further represented that the Fund was comprised of a large, well-diversified portfolio, experienced portfolio managers actively managed the funds, and that investments in the Fund would return higher yields with only marginally higher risk.

Schwab has been accused of failing to disclose material information to investors, including the following facts and circumstances:  (a) the lack of true diversification of the funds’ assets and concentration in the subprime market of mortgage backed and related securities; (b) the funds’ risk profile was significantly higher than money market funds, and not “marginally higher” as represented; (c) the assets held by the funds were susceptible to impaired liquidity; and (d) the valuation of the funds’ assets was speculative and inflated.

Investors now claim that, contrary to Schwab’s representations, the funds’ assets were not well-diversified but concentrated into a risky industry or market segment.  It is claimed that over half of the funds’ assets were invested into securities related to the mortgage industry and that Schwab did not disclose other facts to investors, including:  (a) a significant portion of the bonds held by the funds were issued by Schwab’s top broker dealers (who sold the funds’ shares to customers); (b) no primary market for most of the bonds held by the funds existed and that the only market available was provided by the issuers themselves; (c) the duration of a vast majority of the bonds is greater than 2 years the bonds did not have publicly available durations; and (d) Schwab’s credit and market analysts lacked the expertise to assess the value and risk of the mortgage backed securities acquired for the funds.

Shepherd Smith Edwards & Kantas LTD LLP has a team of attorneys, consultants and others with more than 100 years of combined experience in the securities industry and in securities law. Since 1990, we have represented thousands of investors nationwide to recover losses.  We have represented clients in Federal and state courts and in arbitration through the Financial Industry Regulatory Authority (FINRA), the New York Stock Exchange Inc. (NYSE), the American Arbitration Association (AAA) and in private arbitration actions. Collectively, our clients have recovered more than $100 million through our assistance in negotiation, mediation, arbitration and litigation. We have represented clients in more than 1,000 matters in court, arbitration and/or mediation and more than 90% of those who have engaged our services have recovered all or a portion of their losses. 


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