Charles Schwab settles mortgage-backed securities class action lawsuit
April 23 2010, 3:17 pmWe have all heard a many stories about the credit crunch and how poor practice and greed ended up costing millions of people around the world a lot of money.
By exposing these guilty companies for what they are, we are hopefully preventing the same mistake from happening again. It is therefore vital that when a company is proven guilty in class action lawsuit that it is well documented.
Charles Schwab Corp (SCHW.N) is one such company and they agreed to pay $200 million to settle a federal class-action lawsuit targeting its money-losing YieldPlus mutual fund, erasing nearly all of its first quarter profit.
Schwab in 2008 became the target of litigation and regulatory probes focused on its YieldPlus Fund, a short-duration bond fund that plunged in value following the 2007 credit crisis.
A judge last month said it violated U.S. law in failing to get shareholder approval before putting half the fund’s assets into uninsured mortgage-backed securities.
The settlement forces the brokerage and asset manager to restate first-quarter results that were announced last Thursday. Schwab said it increased its contingency reserve by $172 million pretax, reducing first quarter profit by about $105 million, or 9 cents a share.
That nearly wipes out the $119 million of reported profit, or 10 cents a share. San Francisco-based Schwab previously had set just $11 million aside for potential liability after a summary judgment ruling of liability was issued March 30 with respect to a California state lawsuit.
Schwab did not admit wrongdoing
The settlement is preliminary and subject to a definitive agreement as well as court approval. “We will move as quickly as we can” on getting the approval, said Schwab spokesman Greg Gable.
YieldPlus investors had sought to recover $970 million in damages resulting from the fund’s exposure to the collapsing housing and credit markets. Last week, Schwab for the first time said it could be on the hook for as much as $890 million in litigation.
“We had expected the company to settle ahead of the May 10 trial date and the total fine … is smaller than what many had feared,” wrote UBS analyst Alex Kramm.
Schwab, which runs a big online brokerage unit and offers investment advice, called the settlement “the most effective way for us to move forward.”
The company said it will continue to evaluate the size of its contingency reserve pending the final resolution of the securities class action suit, and warned its total liability related to YieldPlus could be still higher.
Schwab says it cannot estimate its liability related to regulatory probes, and so has not established a reserve.
