Schwab Revised YieldPlus Accord Won't Raise Cost, Investors' Lawyer Says

Charles Schwab Corp. wouldn’t pay more under a revised accord to resolve shareholder lawsuits over losses in its YieldPlus mutual fund than under a $235 million settlement announced in May, a lawyer for investors said.

An attorney for the shareholders, Steve Berman, said the new agreement allows YieldPlus investors outside California to take the settlement of federal securities law claims, or to opt out and individually pursue federal and state law claims in arbitration.

“No additional consideration in terms of dollars, but there is an additional mechanism available to people who feel strongly about it,” Berman told U.S. District Judge William Alsup in court in San Francisco today. The revised agreement is subject to Alsup’s approval.

Schwab said Nov. 8 that it was terminating the settlement because of a dispute over whether out-of-state investors who took advantage of the class settlement could still individually sue the company for unfair business practices.

A memorandum of understanding filed yesterday makes clear that non-Californians who opt out will forego any recovery provided by the settlement.

Previous Agreement

Schwab, the largest independent brokerage by client assets, agreed in May to pay $235 million -- $35 million of which covers state law claims of California investors -- to resolve allegations that it misled customers about the amount of mortgage-backed securities held by YieldPlus, once the world’s largest short-term bond fund.

The San Francisco-based fund’s 1999 registration statement said YieldPlus wouldn’t invest more than 25 percent of its assets in a single industry. Schwab amended the statement in 2006 to say it no longer considered mortgage-backed securities an industry. By 2008 the fund’s investments in those securities, backed by home loans without government guarantees, grew to 50.1 percent of the portfolio, investor lawsuits claimed. Damages of as much as $802 million were sought.

YieldPlus assets peaked at $13.5 billion in 2007, and had fallen to $184 million as of Feb. 28, Bloomberg data show. The company said the fund’s losses were caused by the collapse of the financial markets. It didn’t admit wrongdoing as part of the settlement.

Alsup said he had concerns about the revised agreement.

“I am concerned that the California people will get $35 million and the people outside California get zero,” Alsup said today, adding he would soon rule on the revision.

The settlement is available to 250,000 investors, including 97,000 outside of California, Berman said.

Greg Gable, a Schwab spokesman, declined comment.

The case is In Re Charles Schwab Corp. Securities Litigation, 08-cv-01510, U.S. District Court, Northern District of California (San Francisco).

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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