Schwab Settles Class Action Suit Over YieldPlus Fund

Charles Schwab has agreed to settle a class action lawsuit related to its Schwab YieldPlus Fund for $200 million. YieldPlus was marketed as an “ultrashort” bond fund that was a safe alternative to cash and had “minimal” risk of a fluctuating share price, even though the fund invested in risky mortgage-related securities. As a result, the YieldPlus Fund shrank from nearly $14 billion in 2007 to less than $1 billion in early 2008, leading investors to sue Schwab for misleading them over the safety of YieldPlus investments.

There are two classes of investors in this lawsuit: those who acquired shares in YieldPlus between November 15, 2006 through March 17 2008 and those who acquired shares between May 31, 2006 through March 17, 2008. Shareholders are expected to recover an estimated 23 to 25 percent of their losses after attorney’s fees. This is a huge recoup compared to most securities class actions in this size range, which usually return only about 4 percent of damages.

UPDATE #1: The court approved this class action settlement on May 25.

UPDATE #2: Charles Schwab announced November 8 that it has pulled out of the class action agreement and will take the case to trial. Schwab said it terminated the agreement over a dispute about whether some investors who participated in the settlement could sue the company again.