June 10 (Bloomberg) -- Charles Schwab Corp., the largest U.S. online brokerage, may pay the equivalent of half a quarter's profit, or about $260 million, to win public-relations points by settling investors' claims over losses in a bond fund with subprime holdings.

The San Francisco-based company is accused in eight proposed class-action suits of misleading investors by describing its YieldPlus mutual fund in prospectuses as only ``marginally'' riskier than cash. From last July 1 through April 30, investors lost about $1.3 billion, said Boston-based Financial Research Corp., which tracks investment flows for 35,000 funds.

``Schwab will have a particularly difficult time with this type of adverse publicity because they project themselves as a wholesome broker-dealer,'' said Robert Zito, a Carter Ledyard & Milburn lawyer in New York who defends companies in securities suits and isn't involved in Schwab cases. ``This will put a lot of pressure on them to settle.''

The brokerage, which uses founder Charles Schwab in ads encouraging clients to ``Talk to Chuck,'' has started offering some clients from 50 percent to 90 percent of losses under $10,000, said Robert B. Weintraub of New York-based Wolf Haldenstein Adler Freeman & Herz, who filed one suit. For losses of $50,000 or more, offers have been 5 to 20 percent, he said.

``They seemed to be paying a higher percentage to people who were retired or not sophisticated in the financial markets,'' Weintraub said. He spoke to as many as 20 investors, he said.

Typical Settlements

Settlements of securities class actions typically range from 1 percent to 40 percent, according to analysts. A midpoint payment of 20 percent would cost Schwab $260 million, almost half its $508 million first-quarter operating profit.

A settlement might be $290 million, David Trone, a New York- based analyst for Fox-Pitt Kelton Cochrane Waller said today in a note to clients. That would represent 15 cents a share after taxes, and would slice about 14 percent off his estimate for Schwab's 2008 earnings of $1.12 a share.

``While this isn't insignificant, we believe the benefits of a settlement, namely minimizing negative press to preserve the strong brand reputation, outweigh the financial costs,'' said Trone, who rates the stock ``in line.''

Schwab today rose 42 cents, or 2 percent, to $21.91 in Nasdaq Stock Market trading. The stock has declined 14 percent this year, compared with a 23 percent drop in the American Stock Exchange Broker/Dealer Index.

Settlements Possible

Schwab said in a May regulatory filing that it may settle suits ``because of the uncertainty and risks of litigation.'' A settlement ``could be material to the company's operating results'' for a particular period without harming its overall financial condition, Schwab said.

The company didn't disclose in the filing whether it set aside a reserve to cover YieldPlus suits.

``It is inappropriate and misguided at this very early stage of the litigation -- before a single hearing has even been held in court -- to speculate on the amount of a settlement, if any,'' Schwab spokesman David Weiskopf said June 6 by e-mail. ``In this case, Schwab believes it has strong defenses to the claims.''

Schwab's 70-year-old chairman declined to comment on the suits, Weiskopf said. The percentage of subprime-mortgage-related bonds in YieldPlus fluctuated from about 6 percent to 10 percent, he said.

The lawsuits stand out from those against other firms over subprime-mortgage-related securities because of Schwab's position as the biggest online broker and the extensive successful track records of law firms involved.

Law Firms

Firms competing to lead the case include Coughlin Stoia Geller Rudman & Robbins, based in San Diego, which recovered $7 billion for Enron Corp. shareholders; Bernstein Litowitz Berger & Grossmann of New York, the winner of a $6.15 billion settlement for WorldCom Inc. investors; and Hagens Berman Sobol Shapiro of Seattle, which worked on litigation against Visa and MasterCard that was settled for $3 billion, as well as state tobacco suits that paid $206 billion in claims.

``Schwab shareholders should take it seriously,'' said Adam Savett, RiskMetrics Group Inc. director of securities class- action services. Settlement costs in such cases have run from 15 percent to 40 percent over 12 years, he said.

YieldPlus was the nation's largest short-term bond fund, peaking at $13.5 billion last July. Called an ultra-short bond fund holding assets with durations of a year or less, it was designed for high dividend yields and minimal share price changes, Schwab promotional materials said.

Losses, Redemptions

Losses in July and August sparked redemptions and forced Schwab to sell securities at a loss as credit markets dried up. The fund fell to $680.4 million in the year ending May 30 because of redemptions and a drop in share price from $9.68 to $6.31.

Investors claim in a complaint the company failed to disclose that mortgage-related securities eventually accounted for more than half of the fund's value and might be hard to sell.

Mortgage-backed investments made up 46.8 percent of YieldPlus as of Feb. 29, according to data on the Schwab Web site. Other asset-backed securities composed more than 9 percent.

Schwab separately faces some arbitration claims and individual investors' suits.

U.S. District Judge William Alsup in San Francisco will hold a hearing July 2 on choosing a lead class-action plaintiff. Reed Kathrein, a lawyer with Hagens Berman, estimated losses at $1 billion to $2 billion for people who bought YieldPlus shares in the three years ending March 17.

Schwab, founded in 1973, has quintupled the assets it manages to $1.4 trillion since Web trading started in 1996. First-quarter net income rose to $305 million from $273 million a year earlier.

The Hagens Berman case is 08-cv-01510, U.S. District Court, Northern District of California (San Francisco). The docket includes related cases.

To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net; Edgar Ortega in New York at ebarrales@bloomberg.net.

Last Updated: June 10, 2008 16:21 EDT