Corporate Governance

Schwab Settles $200 Million Federal Class-Action Lawsuit, Suffers Diminished First-Quarter Net Profit

By Katharine Jensen

On April 20, 2010, in one of the largest settlements in a securities case in the northern district of California, Charles Schwab Corp. ('Schwab') settled a federal class-action lawsuit for $200 million.  The plaintiffs to the suit are shareholders of the Schwab YieldPlus Fund, an ultra-short bond fund that invested primarily in fixed income instruments, including mortgage-backed securities and corporate bonds.  Plaintiffs allege a violation of federal securities laws, stating that the YieldPlus prospectus mislead them about the risks and liquidity issues of investing in such a fund.

YieldPlus was originally marketed as an alternative to a money market fund.  Plaintiffs allege that they were surprised in 2007 when the fund suffered huge losses on mortgage-related securities during the credit crisis.   Shareholders then began to pull out of the fund, causing it to deplete even further by selling off investments in a struggling market.

Schwab reports that its first-quarter net income will be reduced due to an increase in contingency reserve established in connection with this litigation.  The company had previously reported a first-quarter net profit of $119 million (or ten cents a share.)  The settlement nearly destroyed Schwab's first-quarter net profit, reducing it to $14 million (or a penny a share.)  Although it set aside $11 million after it won a summary judgment decree based solely on plaintiffs' California state law claims in March 2010, the company had not set aside other funds to deal with a settlement of this magnitude.

The company's stock was up to $19.49 cents a share when the market closed on Tuesday.

The settlement allows the company to avoid the expense and uncertainty of a trial. 

The primary materials for this post are available on the DU Corporate Governance website.

Full post as published by The Race to the Bottom on May 07, 2010 (boomark / email).