Last week, the SEC charged Charles Schwab Investment Management (CSIM) and Charles Schwab & Co., Inc. (CS&Co.) with:
- making misleading statements regarding the Schwab YieldPlus Fund;
- failing to establish, maintain and enforce policies and procedures to prevent the misuse of material, nonpublic information; and
- deviating from the YieldPlus fund's concentration policy without obtaining the required shareholder approval.
According to Antonia Chion, Associate Director of the SEC's Division of Enforcement:
Schwab marketed the fund as a cash alternative with only slightly more risk than a money market fund even though, at one point, half of the fund's assets were invested in private-issuer, mortgage-backed and other securities with maturities and credit quality that were significantly different than investments made by money market funds.
Proceeding against Schwab executives, the SEC also filed a complaint in federal court against CSIM's former CIO for fixed income Kimon Daifotis as well as Schwab official Randall Merk, who is an executive vice president at CS&Co. and was president of CSIM and a trustee of the YieldPlus and other Schwab funds. The gist of the SEC's charges is that "Daifotis and Merk committed fraud and other securities law violations in connection with the offer, sale and management of the YieldPlus Fund."
Though CSIM and CS&Co. have agreed to pay more than $118 million to settle the SEC's charges, the SEC's case continues against the executives.
FINRA has also announced that it has ordered CS&Co. to pay $18 million into a Fair Fund to be established by the Securities and Exchange Commission (SEC) to repay YieldPlus investors. The $18 million settlement amount was derived from the $17.5 million in sales charges collected by Schwab, and a penalty of $500,000. The entire amount has been designated as restitution to customers.
The full text of the SEC's announcement, including links to the individual orders and complaints in the matter, may be found at: http://www.sec.gov/news/press/2011/2011-7.htm
FINRA's announcement is available at: http://www.finra.org/Newsroom/NewsReleases/2011/P122755