Last week a U.S. District Court Judge William Alsup ruled that Charles Schwab Corp. did in fact violate the law when it loaded its YeildPlus Mutual Fund with high risk mortgage-related structured debt with first gaining approval by shareholders.
The ruling may provide a path for the members of one of three classes currently seeking compensation to recover some $140 million in losses that have been attributed to the risky investments fund managers loaded into the popular YeildPlus fund. Questions still remain for the two larger classes, but those may soon be answered as the case is set for trial coming up in May.
The lawsuit claimed that Schwab decreed in 2001 that YieldPlus would hold a maximum of 25 percent of private-label mortgage-backed securities, but in 2006 changed its Statement of Additional Information to allow the fund managers to abrogate that requirement without obtaining shareholder approval. While the 1940 act requires shareholder approval of changes in fundamental issues such as a fund's concentration policy, Schwab unilaterally loaded the $13 billion fund with this riskier class of mortgage securities well beyond the 25 percent limit.
When real estate market collapsed in 2007, so did the fund; costing investors and estimated $650 million.
The Plaintiff is the case claim that Schwab fund managers overloaded the fund with riskier investments in an effort to drive up yields and make the fund more attractive to potential investors. However, when the bottom fell out of the mortgage market this gamble ended up costing investors
Source: Hagens Berman LLP