Hagens Berman LLP: Judge Rules Charles Schwab Violated Law in YieldPlus Mutual-Fund Case

SAN FRANCISCO, March 31 /PRNewswire/ -- A U.S. District Court yesterday ruled that Charles Schwab Corp. (NYSE: SCHW) engaged in unlawful conduct when the company loaded its popular YieldPlus Mutual Fund with high-risk mortgage-related structured debt without shareholder approval.

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In his ruling, Judge William Alsup granted plaintiff's motion for summary judgment, which could allow one of three classes to recover damages as high as $140 million in a proceeding to be held later. Questions surrounding the two larger classes remain, and the case is set for trial on May 10, 2010 if the court allows those claims to proceed. Damages for that class could exceed $650 million.

"We are obviously very pleased that Judge Alsup agreed with our arguments that our clients were injured when Schwab changed the nature of the fund without a shareholder vote," said Steve Berman, managing partner of Seattle-based Hagens Berman, and lead attorney for the plaintiffs. "We are looking forward to the trial so we can ask the court to bring relief for the for the other two groups of shareholders."

Today's ruling satisfies claims by a class of California YieldPlus Fund investors who had invested the fund as of September 1, 2006. The scheduled trial will address claims of all other investors who purchased shares in the fund between May 31, 2006 and March 17, 2008.

Judge Alsup's ruling involved interpretation of the Investment Company Act of 1940, which regulates mutual funds. The act states that once a mutual fund registers a policy defining the fund's concentration of assets, it can only change those concentrations with agreement of a majority of the shareholders.

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.

As the real-estate market collapsed in 2007, the fund's worth – marketed as a cash alternative – plummeted, costing YieldPlus investors an estimated $650 Million in losses.

"Plaintiffs contend that Schwab wanted complete, unfettered control of the fund so the managers could drive up yields, to in turn attract more investors as YieldPlus grew into the largest ultra-short fund in the country," Berman said. "Schwab's money managers did, indeed, jump in and gamble, but with other people's money."

On July 3, 2008, Alsup appointed five members of the YieldPlus Investor Group to the position of lead plaintiff and instructed them to interview and choose lead counsel. On Aug. 14, 2008, the YieldPlus Investor Group submitted their decision to the court to retain Hagens Berman Sobol Shapiro LLP. On Aug. 18, 2008, the Court approved that decision.

SOURCE Hagens Berman LLP