Articles Posted in Charles Schwab

Charles Schwab Should Have Known RIAs Were Promoting the Fund 

Shepherd Smith Edwards and Kantas (SSEK Law Firm at is looking into losses suffered by Vida Longevity Fund, LP investors. Many investors were recommended this open-ended hedge fund by Creative Planning, Pine Oak Investment Advisors, or other registered investment advisors (RIAs) that Charles Schwab Corporation referred them to. 

While it is not uncommon for Schwab to recommend RIAs to clients, the broker-dealer either knew or should have known that these firms were marketing the Fund to customers.

Adam Nash, the CEO of Wealthfront, claims that Charles Schwab & Co. (SCHW) is deceiving investors by claiming that Intelligent Portfolios, its automated investing platform, is free. Nash, whose company competes with Schwab’s new service, contends that the platform will cost consumers thousands of dollars in opportunity expenses involving expensive “smart beta” exchange-traded funds and high cash allocations. These costs, he argues, are concealed in disclosure documents.

Intelligent Portfolios lets consumers manage, rebalance, and oversee their portfolios through the Internet. The program allows investors to evaluate their goals and risk tolerances using specific questions. Investors must have at least $5,000 and they would get recommendations based on their responses.

Algorithms are supposed to help clients build and maintain their portfolios in low cost ETFs with asset classes of up to 20. Intelligent Portfolios joins Wealthfront and Betterment in the robo-field for automated investing.

The SEC is investigating whether Merrill Lynch (MER) and Charles Schwab Corp. (SCHW) did not recognize signs that that some of their customers might have been laundering money because they didn’t do enough to find out who these clients were. Some of the purported money laundering has been linked to drug cartels in Mexico.

Bank of America Corp. (BAC) now owns Merrill Lynch. The SEC says that the two broker-dealers accepted as clients individuals who gave out fake addresses and shell companies. For example, one Charles Schwab client, a Texas rancher, had been moving funds to a holding company that was actually a shell company. Also, some account holders with Schwab were linked to drug money in Mexico. Certain accounts contained millions of dollars.

Broker-dealers must set up, document, and keep up steps so that it can identify its customers and confirm their identifies. Failure to do any of these can result in stiff penalties, such as the $1 million E*Trade Financial Corp. was ordered to pay in 2008. The firm did not check to confirm the identities of over 65,000 secondary account holders. Because of this failure false reporting occurred.

In a victory for the Financial Industry Regulatory Authority, its Board of Governors has determined that Charles Schwab & Co. (SCHW) violated the self-regulatory organization’s rules when it added waiver language to agreements that prohibited customers from becoming part of any class action cases against the financial firm. Schwab has agreed to settle these claims with a fine of $500,000. Also, it will tell all its customers that the requirement is no longer in effect.

Schwab made amendments to the customer account agreement of over 6.8 million investors in 2011. The move came after it settled a class action securities case accusing the broker-dealer of misleading thousands of customers about its YieldPlus money market fund. (The fund sustained huge losses during the 2008 economic crisis, and to resolve the claims, Schwab agreed to pay $235 million.)

Included in the amendments were waiver provisions mandating that customers consent that any claims against the firm could only be arbitrated individually. Also, arbitrators would not be able to consolidate consolidated claims for more than one party.

While regulators continue pondering whether to impose more regulations on money market mutual funds, a number of financial institutions, including Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Fidelity Investments, BlackRock Inc. (BLK), Bank of New York Mellon Corp. (BK), Federated Investors Inc. (FII), and Charles Schwab Corp.,(SCHW), started disclosing the market-based net asset values of these funds last month. Reasons given for these disclosures included offering greater transparency and giving investors more information about the market. However, some believe there are firms are issuing these disclosures because that is what their competitors are doing.

Currently, money market funds have a $1/share stable net asset value for all investor transactions. The underlying assets of the funds, which are debt securities with high ratings, however, can undergo periodic, small value changes that may slightly affect a fund’s per share market value. This is also called the shadow price, which are reasonable estimates/fair valuations of the price that an instrument could be sold at in a current trade.

A few years ago, the Securities and Exchange Commission approved modifications to its Rule 2a-7 and other rules about money market funds mandating that managers of the funds reveal changes to portfolio holdings and give the regulator the market-based net asset values of the funds. Fund information for each month has to be given to the SEC at a succeeding month. The Commission then makes the information available to the public 60 days after the month to which the data pertains has concluded. These Daily disclosures would make the data more immediate (and relevant) for investors.

A federal judge has thrown out a lawsuit filed by Charles Schwab Corp. (SCHW) against the Financial Industry Regulatory Authority Inc. The financial firm had sought to stop the SRO’s enforcement case against it over an allegedly illegal arbitration agreement.

Schwab had added a new provision to over 6.8 million customer account agreement that would prevent clients from beginning or joining a class action lawsuit against the broker-dealer. Customers would also have to agree that industry arbitrators wouldn’t be able to consolidate securities claims from different investors. (Both kinds of cases typically involve investors with smaller claims that are usually less than $10,000. Lawyers who oppose Schwab’s arbitration provision have said that it leaves many of these investors without a legal process to be able to recover any financial losses.) By February, more than 50,000 clients had opened accounts with Schwab since it had implemented its new arbitration provision.

However, FINRA does not let class actions go through its arbitration system and it prevents broker-dealers from limiting the ways in which customers can file claims in court that are not allowed in arbitration. In its enforcement case against Schwab, the SRO accused the brokerage firm of violating its rules by making clients waive their right to file a class action complaint against it. Schwab immediately responded with a lawsuit against FINRA.

The Securities and Exchange Commission is accusing optionsXpress, a Charles Schwab Corp. (SCHW) subsidiary, of being involved in a naked short selling scheme between 2008 and 2010. The SEC filed an administrative order against the online futures and options brokerage and clearing agency, its CEO, and a client while settling with three other company officials. OptionsXpress didn’t come under Schwab’s ownership until 18 months after the alleged securities fraud occurred.

According to the Commission’s Division of Enforcement, the Chicago-based online futures and options brokerage and clearing agency did not meet its obligations under Regulation SHO because it repeatedly took part in a number of fake “reset” transactions that were created to make it appear as if the financial firm had bought securities of “like kind and quality.” CEO/CFO Thomas Stern, who is also named in the order, is accused of taking part in these transactions that resulted in a “continuous failures to deliver” securities to a clearing agency. Such alleged actions violate Commission rules because the SEC mandates that in most cases securities reach a clearinghouse within three days after a trade happens. Otherwise, the brokerage must borrow or buy the security so that the position is closed out by the start of the next trading day at the latest.

The alleged naked short-selling scam occurred when optionsXpress facilitated its customers’ buying of shares while at the same time selling deep-in-the-money call options that were pretty much the economic equivalent of selling shares short. Buying the shares made it appear as if the financial firm had fulfilled its close-out duty when, in fact, the shares that were purportedly bought in the reset transactions were never sent to the buyers because on the day that they were “purchased,” the deep-in-the money calls that occurred caused the shares to be effectively resold. Also, the reset transactions were not actual purchases because they were for perpetuating an open short position while making it appear as if Reg. SHO’s delivery and close out requirements were being met. As a result, optionsXpress and its clients were able to take part in a stock-kiting scheme that kept true stock purchasers from experiencing the benefits of ownership.

One optionsXpress customer, Jonathan I. Feldman, is also named in the SEC’s administrative order. He is accused of taking part in a number of these fake transactions involving several securities. For example, in 2009, he purchased $2.9 billion in securities while selling short at least $1.7 billion of options using his optionsXpress account.

OptionsXpress and Feldman intend to fight the SEC’s administrative order.

Meantime, optionsXpress trading and customer service head Peter Bottini and compliance officers Kevin Strine and Phillip Hoeh have settled the SEC’s allegations against them over the alleged naked short selling scheme. They are accused of knowing (or if they didn’t that they should have known) that the omissions or actions they committed contributed to optionsXpress violating Reg SHO. By settling, they are not denying or admitting to any wrongdoing.

Read the SEC’s administrative order (PDF)

SEC Charges OptionsXpress in Naked Short Selling Scheme, AdvisorOne, April 16, 2012

More Blog Posts:

FINRA Says Charles Schwab Corp. is Making Customers Waive Right to Pursue Class Action Lawsuits, Stockbroker Fraud Blog, February 8, 2012

Fontana Capital LLC Founder Violated Short-Selling Rule, Says SEC, Stockbroker Fraud Blog, February 2, 2011

Goldman Sachs to Pay $22M For Alleged Lack of Proper Internal Controls That Allowed Analysts to Attend Trading Huddles and Tip Favored Clients, Institutional Investor Securities Fraud, April 14, 2012 Continue Reading ›

The Financial Industry Regulatory Authority has filed a complaint against Charles Schwab Corp. The SRO says the online brokerage is in violation of FINRA rules because it makes clients waive their rights to pursue class actions against it.

Per a new provision added to over 6.8 million customer account agreements, Charles Schwab clients are now not allowed to begin or join class-action complaints against the financial firm. Customers must also agree that arbitrators won’t be given authority to consolidate claims from different parties, as this would set up a class-action situation.

Over 50,000 clients have opened accounts with the financial firm since it implemented this new limitation. Now, FINRA wants an expedited hearing. The SRO is concerned that the class action waiver will cause millions of Schwab clients to mistakenly think they cannot bring or take part in an already existing class action complaint against the brokerage firm. Also, FINRA has specific rules about the conditions that financial firms can place on clients, and the SRO says this provision is a definite violation.

The Financial Industry Regulation Authority wants Charles Schwab & Company, Inc. to pay $18 million to a Fair Fund set up by the SEC to payback investors of the Schwab YieldPlus Funds. FINRA found that even after changes to the fund’s portfolio resulted in it being affected by the mortgage-backed securities market crisis, Schwab did not change its marketing of the fund and instead provided inaccurate material.

The FINRA order was announced just as the Securities and Exchange Commission revealed that $119 million settlement was reached with Charles Schwab & Co., Inc. and Charles Schwab Investment Management for their alleged misleading of Schwab YieldPlus Fund investors and failure prevent nonpublic information from being misused. According to the SEC, investors were not adequately told about the risks associated with the Schwab fund. Instead, they were provide with allegedly misleading statements, such as those claiming that investing in the ultra-short bond funds was only slightly riskier than investing in a money market fund. Read our earlier stockbroker fraud blog post for more information.

Schwab has said that it is still facing about 20 individual securities arbitration claims asking for $3 million in damages related to the YieldPlus Fund. Last year, it resolved federal and California state law claims-for $200 million and $35 million, respectively, over the fund.

In other recent Charles Schwab Corp. news, FINRA has announced that it isn’t going to recommend disciplinary action over the firm’s auction-rate securities sales to clients. Charles Schwab had received two Wells notices in 2009 indicating that regulators were recommending enforcement actions.

Related Web Resources:

UPDATE: Finra Won’t Discipline Schwab For Auction-Rate Securities-Filing, The Wall Street Journal, February 25, 2011
SEC Reaches $119 Million Settlement with Charles Schwab, The Blog of Legal Times, January 11, 2011
FINRA Orders Schwab to Pay $18 Million to Investors for Improper Marketing of YieldPlus Bond Fund, FINRA, January 11, 2011

More Blog Posts:
Schwab Settles for $119M SEC Charges It Allegedly Misled YieldPlus Fund Investors, Stockbroker Fraud Blog, January 17, 2011
Class Members of Charles Schwab Corporation Securities Litigation Can Still Opt Out to File Individual Securities Claim, Stockbroker Fraud Blog, December 6, 2010
Charles Schwab & Co. Defendant in Class-Action Securities Fraud Lawsuit Filed on Behalf of Schwab Total Bond Market Fund Investors Over CMOs and Mortgage-Backed Securities, Stockbroker Fraud Blog, September 7, 2010 Continue Reading ›

The Charles Schwab Corp. has agreed to settle for $119 million Securities and Exchange Commission securities fraud charges that it misled investors about the risks involved in its Schwab YieldPlus Fund. By agreeing to settle, Schwab is not denying or admitting wrongdoing.

In 2008, the YieldPlus Fund dropped to $1.8 billion in assets after a peak of $13.5 billion in 2007. The decline happened because, rather than sticking with its stated policy, the fund invested over 25% of assets in private-issuer mortgage-backed securities. According to SEC Division of Enforcement Associate Director Antonia Chion, Schwab promoted the fund as a cash alternative that was supposed to be just slightly riskier than a money market fund even though at one point half the assets were in securities with credit quality and maturity that were very different from the type of investments that money market funds make.

Per the fund’s 1999 registration statement, YieldPlus was to only invest no more than 25% of its assets in one industry. The SEC contends that without obtaining shareholder approval, in 2006 Schwab changed the statement to say that it no longer thought of mortgage-backed securities as an industry. Last year, Schwab agreed to pay $200 million to settle with plaintiffs over the Schwab YieldPlus Fund.

The SEC has also filed a securities fraud complaint against Schwab executives Randall Merk and Kimon Daifotis over the offering, managing, and selling of the Schwab fund. Both men say that they will contest the allegations.

Related Web Resources:
Schwab to Pay $119 Million to Settle SEC Probe Over Misleading Statements, Bloomberg, January 11, 2011
Schwab Settles SEC Charges Over Allegations it Misled YieldPlus Fund Investors for $119M, ThirdAge, January 12, 2011
Class Members of Charles Schwab Corporation Securities Litigation Can Still Opt Out to File Individual Securities Claim, Stockbroker Fraud Blog, December 6, 2010
Read the SEC Complaint against Merk and Daifotis (PDF) Continue Reading ›

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