Many investors have sustained substantial losses in The Schwab Yield Plus Select Fund (SWYSX) and the Schwab Yield Plus Fund (SWYPX), commonly referred to as the “Schwab Yield Funds.” These investors have reported that they were assured that the Schwab Yield Funds were “safe alternatives” to money market funds and cash holdings. The Schwab Yield Funds turned out to be anything but safe, as many investors have lost a major portion of the principal invested in these Funds. While the average ultra short term bond fund has lost approximately 1.9% in the last 6 months, the Schwab Yield Funds have dropped about 24%.
According to our firms’ findings, several employees of Charles Schwab misrepresented the risks associated with the Schwab Yield Funds. Moreover, Charles Schwab failed to inform investors that the Funds’ managers had concentrated the Funds’ assets in collateralized bond obligations (“CBOs”), collateralized loan obligations (“CLOs”), and collateralized mortgage obligations (“CMOs”), collectively referred to as “collateralized debt obligations” (“CDOs”) or “structured financial products.” These securities were and are thinly traded and illiquid, and often difficult to value. Essentially, investors of the Schwab Yield Funds received a mutual fund concentrated in speculative, risky mortgage backed securities. The manner in which the Schwab Yield Funds were invested made them more like hedge funds rather than money market funds.
Reportedly, the Schwab Yield Plus prospectus made the following misleading or fraudulent misrepresentations: “The Schwab Yield Plus fund is an ultra short-term bond fund, designed to offer high current income with minimal changes in share price”; “Strategy: To pursue its goal, the fund primarily invests in investment-grade bonds (high and certain medium quality, AAA to BBB — or the unrated equivalent as determined by the investment adviser)…To help maintain share price stability and preserve investor capital, the fund seeks to maintain an average portfolio duration of one year or less”; and “The fund’s investment strategy is designed to offer higher yields than a money market fund while seeking minimal changes in share price.”
Finally, investors should strongly consider all of their legal options when attempting to recover losses in the Schwab Yield Funds. While a class action lawsuit regarding the Schwab Yield Funds has been filed, KlaymanToskes reminds investors of the benefits of filing an individual arbitration claim, as opposed to participating in a class action. By participating in a class action lawsuit, an investor will most likely recover only pennies on the dollar. However, if one has experienced losses of $50,000 or more in the Schwab Yield Funds, it may be more beneficial for them to file an individual securities arbitration claim. In 2003, KlaymanToskes conducted a study of securities arbitration versus class action. The study concluded that investors who file a securities arbitration claim may obtain an overall higher rate of recovery as opposed to participating in a class action lawsuit. In class action, the only ones who really benefit are the class action attorneys. However, if one files their case on an individual basis, the likelihood of recovering a significant amount of investment losses increases significantly. Our firm is also seeking all remedies available under the applicable state statutes, including attorneys’ fees.