The Charles Schwab Corporation ("Schwab" or the Company), headquartered in San Francisco, CA, provides brokerage services to retail investors.
The original class action lawsuit was filed on behalf of those who purchased Schwab YieldPlus Funds Investor Shares or Schwab YieldPlus Funds Select Shares from Schwab during the Class Period.
Specifically, the Complaint claims Schwab, the funds' underwriter, investment advisers and officers and directors issued untrue statements regarding the lack of diversification of these funds and the extent of investments assigned to sub-prime mortgage backed and related securities. The Complaint alleges the funds registration statements and prospectuses contained untrue statements of material facts, and omitted important information regarding the funds' investments, ultimately misleading investors.
On Nov. 15, 2004, the Company began offering the Schwab YieldPlus investment funds through a registration statement and prospectus. The YieldPlus funds were advertised by the Defendants as 'a safe alternative to money market funds that preserve principal while being designed with your income needs in mind'. Throughout the Class Period, the Company claimed the funds were investments in a large, well-diversified portfolio, a seasoned team of taxable bond portfolio managers actively managed the funds, and that investment in Schwab YieldPlus would return higher yields on cash with only marginally higher risk, a smart alternative. Since July of 2007, the share price for the funds began lowering, for a total loss of 18 percent. Soon the funds reached an all-time low of $7.96, down more than 11 percent from Jan. 1, 2008.
The lawsuit claims the funds are not well diversified, instead concentrated in a single risky industry with more than 50 percent of the funds assets invested in the mortgage industry. The lawsuit seeks remedies under the 1933 Act on behalf of all fund purchasers during the Class Period.
On August 18, 2008, the Honorable William H. Alsup granted the motion of the lead Plaintiff to appoint law firm Hagen Berman Sobol Shapiro LLP as its lead Counsel in the case. On October 2, 2008, the Plaintiffs filed a First Consolidated Amended Complaint against all Defendants. The First Consolidated Amended Complaint adds additional claims and Defendants. On November 6, 2008, the Defendants filed several motions to dismiss the First Consolidated Amended Complaint.
On February 4, 2009, the Honorable William H. Alsup issued the Order on the various motions to dismiss. According to the Order, the motions to dismiss filed by the Schwab Defendants and the independent trustees were granted in part and denied in part. PricewaterhouseCoopers’ motion to dismiss was granted. Finally, the motion to strike was denied. Plaintiff may move for leave to amend the dismissed claims by February 26, 2009.
On May 1, 2009, the lead Plaintiffs filed a motion to certify the class On August 21, 2009, Judge Alsup granted in part and denied in part the motion. On October 26, 2009, the lead Plaintiff filed a Second Consolidated Amended Complaint. The parties soon engaged in discovery proceedings. In February 2010, the Defendants and the Plaintiffs filed various motions for summary judgment and one motion for partial summary judgment.
According to the Order Re 1940 Act Summary Judgment Motions dated March 30, 2010, and signed by Judge William Alsup, to the foregoing extent, Plaintiffs’ motion for summary judgment is granted and Defendant’s motion is denied.
According to a press release dated April 20, 2010, Schwab announced that it has signed a memorandum of understanding with Plaintiffs to settle federal securities law claims in a civil class action lawsuit related to the Schwab YieldPlus Fund®. The preliminary settlement is subject to a definitive agreement and final approval of the court. Other related regulatory matters and a California state law claim remain open. As disclosed previously, the Company is the subject of consolidated class action litigation filed between March and May 2008, and regulatory investigations relating to the investment policy, disclosures, and marketing of the Schwab YieldPlus Fund, an ultra-short bond fund (“Bond Fund”). The Bond Fund was designed to invest in a variety of fixed income instruments, including corporate bonds, asset backed securities, mortgage-backed securities, and other fixed income investments. The credit crisis that began in mid-2007 led to a decline in the value of a majority of fixed income investments market wide. As a result, certain Schwab clients who chose to invest in the Bond Fund experienced a decline in their investments, leading to the litigation. The settlement, in which the Company, without admitting liability, would pay a total of $200 million to resolve Plaintiffs’ federal law claims, allows the Company to avoid the distraction and uncertainty of a trial, and the further possibility of a protracted appeals process.
On April 23, 2010, a Joint Motion for Preliminary Approval of Settlement of Federal Securities Claims was filed. The proposed settlement is in the amount of $200 million in cash on behalf of Schwab YieldPlus Fund shares acquired between May 31, 2006, and March 17, 2008.
On May 3, 2010, the Defendants filed a motion for summary judgment re Section 17200 Claim. The motion was granted on May 6, 2010. On May 14, 2010, a Joint Motion for Preliminary Approval of California Class Settlement was filed. The proposed settlement is in the amount of $35 million in cash on behalf of Schwab YieldPlus Fund shares held by California residents on September 1, 2006.
The joint motions for preliminary approval of the settlement were granted on May 26, 2010. Plaintiffs filed several motions to opt out of the class action, which were denied by the judge in May 2010. The Plaintiffs have filed motions for final approval of the settlement Federal Class and California Class settlements. The final settlement hearing was set for September 22, 2010, but the settlement was delayed due to a dispute about the class.
On October 4, 2010, Judge Alsup denied more Plaintiffs' motions to opt out of the class action. The settlement fairness hearing was set for December 15, 2010.
According to a press release dated November 8, 2010, Charles Schwab Investment Management and Charles Schwab & Co., Inc. notified counsel for the Plaintiffs in a consolidated class action lawsuit relating to the Schwab YieldPlus Fund® that Schwab is invoking the termination provisions of the settlement agreements in those actions. Schwab has also filed with the court a notice of withdrawal from the original motions filed jointly by Plaintiffs and Defendants for final approval of the settlements. At this time, Plaintiffs continue to support the original motion for final approval, which remains pending and subject to a hearing scheduled for mid-December. Schwab provided the following additional comments: In the spring of 2010 after a lengthy and cooperative negotiation with Plaintiffs' lawyers, Schwab agreed to a substantial settlement of $235 million to settle all claims in the Yield Plus class action proceedings, regardless of their merit. Schwab was fully prepared to contest the allegations at trial but wanted to provide significant and speedy financial benefit to valued clients who purchased or held the fund during the period covered by the lawsuit and to put the matter behind them. Plaintiffs' lawyers had praised the settlement as one in which clients would receive "real money" and "a high percentage of recovery." Plaintiffs' recent assertions, that they continue to have the right to sue on behalf of non-California class members, means that none of the parties will receive the benefit of the agreement originally negotiated. As a result, Schwab has determined its only option is to withdraw from the settlement and litigate the case rather than subject the Company and its shareholders to yet more litigation over the same issues. Schwab worked hard to settle this case for the benefit of its clients and shareholders and thought it had accomplished that goal.
The final fairness hearing was set for February 11, 2011. According to the Court Minutes entered that day, Court found it is a fair and adequate settlement. Counsel are directed not to communicate with intervener counsel.
On April 19, 2011, Judge Alsup granted the motions for final approval of the class settlement agreements and granted in part the motion for attorney's fees and expenses. The Final Judgment and Order of Dismissal with Prejudice was filed for both the federal securities class settlement fund and the California class settlement fund.
