Charles Schwab's YieldPlus fund was marketed as a safe alternative to cash and similar to a money market fund. But Schwab laced this fund with mortgage-backed securities into the YieldPlus'portfolio to pump up performance. YieldPlus has lost 24% of its value this year, while the average ultra-short bond fund is down just 1.9%. A lot of investors report being told by their brokers and financial advisors this fund was a money market fund.

What was never disclosed to investors of the Select Fund was that the Fund in fact:

• was heavily concentrated in high risk mortgage backed securities and similar investments;
• the Fund was exposed its investments to substantial credit and market risks;
• the Fund invested in illiquid securities that affected the Net Asset Value (“NAV”) of the Fund;
• that the determination of the NAV of the Fund was arbitrary and based on estimated values of illiquid investments;
• the Fund was not well-diversified and was concentrated in a single risky industry or market segment;
• more than 50% of the Fund’s assets were invested in the mortgage industry, and that this percentage grew as SCHWAB abandoned the objectives of the Fund in pursuit of higher returns;
• that there was no viable, liquid market for many of the bonds held in the Fund, and in fact the primary market for many of the bonds was the issuers themselves;
• the duration of a vast majority of the bonds held in the Fund was greater than 2 years, and that a majority of the bonds did not have publicly available durations;
• the Fund relied blindly on ratings issued by ratings agencies who were paid by the Fund’s broker-dealers;
• the NAV of the Fund was highly speculative and inflated;
• many of the securities in the Fund were illiquid and/or thinly traded, and thus difficult to price; and;
• the Fund’s shares were subject to substantial and dramatic volatility.

To meet redemptions, YieldPlus has had to unload bonds, potentially at fire-sale prices, tied to a variety of troubled companies, including New Century Financial, Washington Mutual, Countrywide Financial, and Bear Stearns. Schwab blames its problems on the credit crunch and says they affect only a small part of the company, which is performing well overall. And in a backhanded no-confidence vote, none of the other Schwab funds will hold YieldPlus in their portfolio starting in April.

Investors are suing Schwab for misleading them about the YieldPlus fund but Schwab is denying the allegations. Lawsuits and the fund's failure is a setback to Schwab's effort to diversify beyond collecting volatile trading fees. Schwab started out providing discounted stock trading and then sold others' mutual funds before moving into offering its own funds and advisors to build a steadier revenue stream. Service fees totaled 23% of the firm's net revenue last year but YieldPlus' failure has meant lost fees.

YieldPlus isn't alone in its trouble though. Similar but less popular funds like Fidelity Ultra-Short Bond Fund and SSgA Yield Plus from State Street Global Advisors have also been hurt in recent months. The funds are down 7.3% and 18% respectively this year.

If you purchased Schwab Yield Plus Select Fund SWYSX or Schwab’s Yield Plus investor shares SWYPX call the Soreide Law Group today to go over all of your investment recovery options. Soreide Law Group represents investors nationwide before the Financial Industry Regulatory Authority. Call 888-760-6552.

Update 8/7/2009
Investor Wins FINRA Award In Schwab YieldPlus Claim

On June 26, 2009, a Washington, D.C., securities arbitration panel of the Financial Industry Regulatory Authority (FINRA) ruled in favor of investor David Cutler and his claim (FINRA No. 09-00300) against Charles Schwab & Company and its Schwab YieldPlus Fund. The panel awarded Cutler $11,400.

Cutler’s complaint against San Francisco-based Charles Schwab is similar to hundreds of other arbitration claims filed with FINRA by investors who allege that Charles Schwab misrepresented the risks of the Schwab YieldPlus fund by failing to disclose important information about the risky securities it held.

Specifically, the Schwab YieldPlus fund was marketed and sold as a safe and conservative alternative investment to money market funds. Later, investors learned the YieldPlus fund was heavily concentrated in high risk and toxic subprime mortgage-backed securities and in even more risky collateral debt obligations (CDOs). Ultimately, Schwab’s failure to diversify the fund’s portfolio caused investors to collectively lose approximately $1.3 billion in 2008.

In 2008, approximately 74% of customer claimant cases filed with FINRA resulted in monetary settlements or awards for the investor. A San Diego arbitration panel of the Financial Industry Regulatory Authority (FINRA) has ruled in favor of the widow of San Diego resident Everett Ross for losses sustained by the Ross family trust in the Charles Schwab YieldPlus Fund. The award includes 100% of the claimant’s net out-of-pocket losses of $157,498 plus expert witness costs, as well as the entire cost of the arbitration proceeding against Charles Schwab.

The Schwab YieldPlus funds initially were offered in November 2004 and marketed and sold as a safe alternative to money-market funds. Marketing materials about the YieldPlus products touted such features as preservation of capital while generating income with relatively low risks.

Instead, more than 50% of the Schwab YieldPlus funds’ assets were invested in the subprime mortgage industry. Ultimately, this overconcentration, along with the risks associated with subprime securities, caused the funds to plummet in value. Meanwhile investors suffered millions of dollars in losses.