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Charles Schwab to pay $200M to settle lawsuit

SAN FRANCISCO — Charles Schwab will pay $200 million to resolve a federal class action lawsuit filed by investors who say the financial holding company misled them over the safety of mortgage-backed securities.

If approved by the court, the settlement announced today will result in a retroactive charge that would nearly eliminate the first-quarter profit that the discount broker posted last week.

The fund that angered investors, the YieldPlus Fund, shriveled from nearly $14 billion in 2007 to less than $1 billion in early 2008, as investors bailed out and managers were forced to dump their holdings cheaply.

The U.S. District Court in California will decide if Schwab can avoid trial with the settlement, yet the fund’s collapse is still the subject of investigations by the Securities and Exchange Commission and the Financial Industry Regulatory Authority.

YieldPlus invested heavily in securities backed by risky mortgages made during the housing boom.

A similar complex financial product is at the center of the SEC’s civil case filed Friday against Goldman Sachs Group Inc.

In that case, the New York-based investment bank is accused of misleading clients who were unaware the securities were crafted with input from a hedge fund that bet the assets behind them would fail.

Schwab added $172 million to its legal reserves to cover the settlement.

If approved, the settlement will result in a retroactive charge of $105 million, or 9 cents per share, for Schwab’s first quarter. The company last week reported profit of $119 million, or 10 cents per share, for the first three months of the year.

In morning trading, shares of Charles Schwab Corp., based in San Francisco, added 20 cents, or 1 percent, to $19.26.


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