Protecting Investors - Leveraged ETFs, Inverse ETFs, Lehman Brothers Principal Protected Notes, Structured Products, REITs, Bonds

Vernon Healy files $1 million claim involving Medical Capital Notes, Provident Royalties / Shale Oil, Striker Petroleum and Inland REIT, KBS REIT and Desert Capital REIT

Vernon Healy Attorneys at Law — Thu, 04 Mar 2010 07:53:30 -0800

A reckless stockbroker with CapWest Securities Inc. negligently urged a retired couple to plunge more than $1 million of their nest egg into so-called income producing “alternative investments” that turned out to be bogus Ponzi schemes and highly speculative real estate investments, according to a claim filed by Vernon Healy.

The Florida couple now faces foreclosure on their home, and they have seen their monthly retirement income from these investments drop from $8,000 to $600 per month.

The couple’s CapWest Securities stockbroker, who called himself a “retirement planning specialist,” pledged that both he and his employer conducted due diligence on the investments, but three of the investments have now been shut down as Ponzi schemes by the SEC.

The three Ponzi schemes in which the couple were urged to invest were Medical Capital Notes, Provident Royalties’ Shale Oil Royalties program, and Striker Petroleum.

“Ponzi schemes like Medical Capital fed brokers ultra-high commissions so they could sell these alternative investments to the public and collect a steady stream of money from new investor victims,” said investor rights attorney Chris Vernon. “Reckless and greedy firms like CapWest Securities should be held accountable for creating a pipeline for these products and then pushing them on financially vulnerable retirees.”

Basic due diligence by CapWest securities and its stockbroker would have called into question Medical Capital’s business practices: Medical Capital’s CEO had been sued for fraud in the 1990s and he had his insurance license revoked by California regulators; Medical Capital’s financial statements had never been audited; and Medical Capital loaned $90 million of investors’ money for hospital purchases to a company called IHHI whose CEO had been sued for fraud and embezzlement at a previous job, according to the claim.

The non-traded REITs, or private REITs, and real estate partnership deals the couple invested in have to a large extent shut down redemptions and suspended distributions, thus essentially depriving the couple of access to almost half of their retirement savings because they are currently unable to liquidate. The non-traded REITs include Desert Capital, Inland REIT, KBS REIT, and the IMH Secured Loan Fund. In addition, the couple was sold two private real estate LLC programs: Clovis Senior Living LLC, which was shut down by Oregon regulators, and Blue Rock 1355 First Ave. LLC.

To read more about the claim filed by Vernon Healy, click here.

Vernon Healy is a Naples, Florida law firm that represents investors nationwide who are victims of stock fraud and stock losses due to broker fraud and brokerage firm fraud and misconduct. Vernon Healy securities attorneys are experienced in arbitration and litigation and the firm assists clients in attempting to recover losses caused by all manner of financial fraud and negligence. It focuses its practice on complex financial litigation and arbitration as well as other complex business litigation and arbitration.

For more information contact,

Chris Vernon, attorney at law

Vernon Healy
Naples, Florida
www.vernonhealy.com
239-649-5390
Toll Free: 1-877-649-5394

Investor losses in leveraged ETFs and inverse ETFs or Exchange-Traded Funds prompt investigation by Vernon Healy and McCabe Rabin law firms

Vernon Healy Attorneys at Law — Wed, 23 Dec 2009 04:58:46 -0800

Following recent warnings from the SEC and the Financial Industry Regulatory Authority (FINRA) regarding the dangers of leveraged and inverse exchange-traded funds (ETFs), the law firms of Vernon Healy and McCabe Rabin, P.A., announced that they are investigating investor losses in these complex and dangerous financial products.

ETFs are investment vehicles that track an underlying benchmark or index, much like a traditional mutual fund. Unlike mutual funds, non-traditional ETFs typically trade throughout the day on securities exchanges like stocks. Over the last several years, ETFs have become more common, but also more complex. Rather than merely track underlying indices or benchmarks, some non-traditional ETFs have been devised to multiply or return the opposite of a given benchmark.

Thus, leveraged ETFs use futures or derivatives to multiply the daily return of a given index, such as the S&P 500, and sometimes strive to double or even triple the daily return. Leveraged ETFs are frequently marketed with the term “Ultra” or “2X” in their ETF trade name. Likewise, inverse ETFs seek to return the opposite of a given index, or double or triple the opposite of an index. Inverse ETFs are often marketed as a way to hedge an investment strategy and they frequently carry the term “Short” or “Ultra Short” in their ETF trade names.

The SEC and FINRA recently warned that leveraged ETFs and inverse ETFs are extremely complex products that carry a great deal of risk. These products are typically designed to meet their stated objectives on a daily basis.

They are not designed to be held for long periods of time, and FINRA has warned that inverse ETFs and leveraged ETFs may not be suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.

Leveraged and inverse ETF’s suffered dramatic losses following the market volatility of 2008 and 2009. Commonly sold ETFs during this time included the following:

ProShares Ultra Short Real Estate Fund (SRS)

ProShares UltraShort Dow 30 ETF (DXD)

ProShares UltraShort Financials ETF (SKF)

ProShares UltraShort FTSE/Xinhua China 25 ETF (FXP)

ProShares UltraShort Gold ETF (GLL)

ProShares UltraShort DJ-AIG Crude Oil ETF (SCO)

ProShares UltraShort Oil & Gas ETF (DUG)

ProShares UltraShort MSCI Emerging Markets ETF (EEV)

ProShares Ultra Financials ETF (UYG)

ETF trading losses have spawned numerous class action suits involving individual ETFs. In addition to class action suits, investors who suffered losses in leveraged or inverse ETFs may have individual arbitration claims against the brokers and financial advisors who sold the investments. Such claims are typically brought before FINRA and are based upon misconduct committed at the time of sale.

Misconduct might include misrepresenting the risks involved with these ETFs, failing to fully explain the risks and how ETFs work, and recommending ETFs to clients for whom the investment was not suitable.

If you would like to speak to an attorney for a free consultation regarding a potential claim for losses, please call Chris Vernon at (239) 649-5390 or e-mail info@vernonhealy.com.

As Underwriter of the Schwab YieldPlus Fund, Charles Schwab Had a Due Diligence Duty to Ensure the Accuracy and Completeness of the Representations Made in the Prospectus

Vernon Healy Attorneys at Law — Thu, 19 Nov 2009 12:17:45 -0800

On Sept. 30, 1999, Charles Schwab acted as the sole underwriter in the initial public offering of the Schwab YieldPlus Fund.

Schwab Investments, Inc., the issuer of the Schwab YieldPlus Fund and an affiliate of Charles Schwab, revises and disseminates an updated prospectus for the Schwab YieldPlus Fund at least annually.

At all relevant times, Charles Schwab, as the underwriter of the Schwab YieldPlus Fund, had an ongoing due diligence duty to make a reasonable investigation to assure itself that the representations made in the fund’s registration statement and prospectus were accurate and complete. See, e.g., In re Brown, Barton & Engel, 43 S.E.C. 43 (1966); In re Amos Treat & Co., Inc., 42 S.E.C. 99 (1964). The Securities and Exchange Commission has set forth the following guidance regarding the due diligence duties of underwriters:

“It is a well established practice, and a standard of the business, for underwriters to exercise diligence and care in examining into an issuer’s business and the accuracy and adequacy of the information contained in the registration statement. By associating himself with a proposed offering, an underwriter impliedly represents that he has made such an investigation in accordance with professional standards. Investors properly rely on this added protection which has a direct bearing on their appraisal of the reliability of the representations in the prospectus. The underwriter who does not make a reasonable investigation is derelict in his responsibilities to deal fairly with the public.” In re Richmond Corporation, 41 S.E.C. 398, 406 (1963).

“[An underwriter] owe[s] a duty to the investing public to exercise a degree of care reasonable under the circumstances of th[e] offering to assure the substantial accuracy of representations made in the prospectus and other sales literature.” In re Charles E. Bailey & Company, 35 S.E.C. 33, 41 (1953).

The Seventh Circuit Court of Appeals in Sanders v. John Nuveen & Co., 524 F.2d 1064, 1069-70 (7th Cir. 1975), vacated and remanded on other grounds, 425 U.S. 929, 96 S.Ct. 1659, 48 L. Ed. 2nd 172 (1976), further elaborated upon the rationale for imposing upon underwriters the due diligence duty to investigate the accuracy and completeness of the issuer’s representations as follows:

“An underwriter’s relations with the issuer gives the underwriter access to facts that are not equally available to members of the public who must rely on published information. And the relationship between the underwriter and its customers implicitly involves a favorable recommendation of the issued security.

Because the public relies on the integrity, independence and expertise of the underwriter, the underwriter’s participation significantly enhances the marketability of the security. And since the underwriter is unquestionably aware of the nature of the public’s reliance on his participation in the sale of the issue, the mere fact that he has underwritten it is an implied representation that he has met the standards of his profession in his investigation of the issuer. (Emphasis supplied.)”

On Aug. 17, 2009, the State of New York Attorney General brought an enforcement action against Charles Schwab in connection with the firm’s sales of auction rate securities to its customers. People of the State of New York by Andrew M. Cuomo, Attorney General of the State of New York against Charles Schwab & Co., Inc. (Aug. 17, 2009). The markets for auction rate securities began to fail in August 2007 and experienced widespread failures in mid-February 2008.

These failures have prevented Charles Schwab customers who purchased these securities from selling them and accessing money that they invested based upon representations that the securities were highly liquid.

The New York Attorney General’s complaint alleges that Charles Schwab engaged in misleading sales practices by describing auction rate securities to prospective investors as safe, liquid, short-term investments that were suitable for investors to use for their cash management purposes. Complaint at paragraph 30.

The State of New York also alleged that Charles Schwab misrepresented or failed to disclose to investors the liquidity risks associated with auction rate securities. Id. Charles Schwab has vigorously denied any wrongdoing in this case.

Although the Schwab YieldPlus Fund did not hold any auction rate securities in its portfolio, Charles Schwab’s responses to the allegations made by the State of New York are highly relevant to the factual and legal issues being contested in the Schwab YieldPlus Fund cases.

Charles Schwab has posted on its website a letter dated July 24, 2009 to the New York Attorney General’s Office from attorney Faith Gay of the law firm Quinn Emanuel, the New York law firm representing Charles Schwab in this matter. The letter sets forth Charles Schwab’s arguments regarding why the State of New York’s expected enforcement action would be both unjust and unwarranted.

Charles Schwab’s primary defense as set forth in its law firm’s July 24, 2009 letter is the fact that because it was not an underwriter of the auction rate securities that it sold to its customers, it did not have access to the information about the serious difficulties that the auction rate securities markets began to experience in August 2007. Charles Schwab asserts that it was, in fact, deceived by the underwriters of the ARS, as stated below in Faith Gay’s letter dated July 24, 2009 to the New York Attorney General’s Office:

Schwab And Its Customers Were Deceived By The Underwriters/Lead Managers

Conspicuously missing from the Attorney General’s purported 5-day notice letter is the major role that the lead underwriters played in deceiving Schwab, withholding critical information regarding ARS from Schwab, and providing misleading information knowing that Schwab would rely on that information and pass it on to customers. As underwriters and “lead managers” of the auctions for the ARS they underwrote and brokered, these firms had information regarding the auction market, and their own manipulation of the market, that was not known to or knowable by Schwab or Schwab’s clients. . . .

With no role in the underwriting of ARS, Schwab relied on the lead underwriters for access to ARS and relied on information regarding ARS and the auction markets provided by these firms. . . . Faith Gay/Quinn Emanuel Letter dated July 24, 2009 at p. 4.

The Shine-Vernon legal team in its representation of Schwab YieldPlus Fund investors has alleged that Charles Schwab did not live up to this standard when it acted as the sole underwriter of the Schwab YieldPlus Fund. The Shine-Vernon Team is alleging on behalf of its clients that Charles Schwab knew or was reckless or negligent in not knowing the liquidity risks associated with asset-backed and mortgage-backed securities held by the Schwab YieldPlus Fund. [See Law Commentary dated November 18, 2009 for a detailed discussion pertaining to these risks.]

The Shine-Vernon Team has alleged that Charles Schwab and its affiliates failed to disclose these risks to prospective investors in the fund. The Shine-Vernon Team, which represents a number of Schwab YieldPlus Fund investors nationwide, is also alleging that Charles Schwab made a number of other misrepresentations and omissions of material fact in connection with its underwriting and marketing of the Schwab YieldPlus Fund to its customers.

These alleged misrepresentations and omissions included:

■ The fact that the Schwab YieldPlus Fund was not an ultra short-term bond fund as stated in the fund’s prospectuses [See Law Commentary dated Nov. 17, 2009.];
■ The implementation of investment strategies of maintaining minimal proportional cash equivalent balances while contemporaneously and significantly increasing the fund’s concentration in higher yielding and illiquid asset-backed and mortgage-backed securities. These strategies were inconsistent with the Schwab YieldPlus Fund’s stated investment objectives and level of risk which called for high current income with minimal changes in share price;
■ The overall level of safety of the Schwab YieldPlus Fund, in that, it was described and marketed to investors as an alternative to cash, and analogized to 1-year and 2-year certificates of deposit;
■ The true features of the fund, in that, Charles Schwab falsely classified it as “Portfolio Cash,” the same category assigned to 1-year and 2-year certificates of deposit; and
■ The fund’s lack of liquidity in July and August 2007 and at various times thereafter available to meet substantial redemptions in the fund.

The Charles Schwab response to the proposed (and later instituted) New York Attorney General’s auction rate securities enforcement action acknowledges and highlights the crucial due diligence investigation duties that Charles Schwab, acting as the sole underwriter of the Schwab YieldPlus Fund, owed to prospective investors prior to marketing this fund to the public.

For more information, please contact attorney Chris Vernon of Vernon Healy by email at cvernon@vernonhealy.com or by phone at (239) 649-5390.

Charles Schwab Knew Or Should Have Known About The Liquidity Risks Of Asset-Backed And Mortgage-Backed Securities And Did Not Disclose These Risks To Schwab YieldPlus Fund Investors

Vernon Healy Attorneys at Law — Thu, 19 Nov 2009 09:00:48 -0800

In June and July 2007, the forced liquidation of two Bear, Stearns & Co., Inc. hedge funds invested primarily in mortgage-backed securities bonds backed by pools of sub-prime mortgages, focused attention on the liquidity risks of securities that had assumed an inappropriately large role in the Schwab YieldPlus Fund. These were risks that had previously been highlighted by bank and securities regulators during the 1990s.

As of July 31, 2007, the Schwab YieldPlus Fund was the largest ultrashort bond fund in its Morningstar category with the fund’s total net assets having grown to approximately $13.4 billion.

As of that date, the Schwab YieldPlus Fund’s asset allocation consisted of asset-backed obligations (approximately 12 percent), collateralized mortgage obligations (CMOs) and other mortgage-backed securities (approximately 44 percent), and corporate bonds (roughly 43 percent of total net assets). The fund contained less than 2 percent collectively in preferred stock, commercial paper and other obligations, U.S. Treasury obligations and short sales, swap agreements and futures contracts.

The Schwab YieldPlus Fund experienced net shareholder redemptions in August 2007 of almost $2.4 Billion (almost 18% of total net assets). These redemptions, combined with the low cash equivalent balances that the fund was maintaining to boost its performance relative to its ultrashort bond fund category peer, forced the Schwab YieldPlus Fund portfolio managers to sell asset-backed obligations, mortgage-backed securities and corporate bonds into an illiquid market at distressed prices in order to generate cash.

The realized and unrealized losses that the Schwab YieldPlus Fund sustained on these August 2007 sales resulted in the fund’s net asset value price (NAV) per share declining from $9.67 to $9.42 per share during the period from July 31 through Aug. 31, 2007.

Schwab YieldPlus Fund shareholders continued to redeem their shares over the next nine months. This forced the fund’s portfolio managers to continue to sell asset-backed obligations and mortgage-backed securities into an illiquid market at steadily mounting losses and corresponding declines in the NAV price of the fund.

By May 31, 2008, the Schwab YieldPlus Fund’s NAV had declined in market value to $6.31 per share, and its total net assets had plummeted to $689 million, down 94.9 percent from the $13.4 billion in total net assets managed by the fund on July 31, 2007.

The Shine-Vernon legal team, in its representation of Schwab YieldPlus Fund investors, has alleged that Charles Schwab failed to disclose to investors the liquidity risks associated with asset-backed obligations and mortgage-backed securities. Banks and broker-dealers not only had been previously alerted to these risks by bank and securities regulators in the 1990s, but the risks were also routinely described in the prospectuses for the individual bonds held by the Schwab YieldPlus Fund portfolio.

Bank Regulator Guidance - 1992

The Office of the Comptroller of the Currency (the OCC) regulates and supervises national banks. On Jan. 10, 1992, the OCC published and distributed to banks revised Banking Circular 228 (BC-228), which is an official policy statement of the OCC.

Pursuant to its issuance of BC-228, the OCC made it clear that mortgage derivative products are "complex" instruments, requiring "a high degree of technical expertise . . . to understand how their prices and cash flows may behave in various interest rate and prepayment environments."

The OCC further advised banks that, since the secondary market for some of the mortgage derivative products was relatively thin, they might be difficult to liquidate should the need arise. OCC Banking Circular 228 at pp. 58-59, 61 (Jan. 10, 1992).

Self-Regulatory Organization Securities Regulator Guidance - 1993 and 2003

The Financial Industry Regulatory Authority (FINRA, which was formerly known as the National Association of Securities Dealers, Inc. or NASD) is the broker-dealer self-regulatory organization of which brokerage firms such as Charles Schwab are members. FINRA frequently provides legal and regulatory guidance to its broker-dealer member firms through Notices To Members (NTMs) that it promulgates and disseminates.

In October 1993, the NASD issued NASD NTM 93-73 “Members Obligations to Customers When Selling Collateralized Mortgage Obligations” (CMOs) which reminded member brokerage firms of their obligations when recommending CMOs to their customers. The NASD in this notice warned brokerage firms about the liquidity risks associated with CMOs as follows:

Condition of the Secondary Market/Liquidity

While there is a sizeable secondary market for CMOs generally, there is less of a market for the more risky and complex tranches. CMOs are less uniform than traditional mortgage-backed securities and more expensive to trade. It is also harder to obtain current pricing information. Matching up buyers and sellers is often difficult, especially for the more esoteric tranches . . . In addition, members, should clearly inform investors of extra costs or commissions associated with CMO transactions.

In Nov. 2003, the NASD issued NASD NTM 03-71 “Non-Conventional Investments,” which grouped asset-backed securities with two other products and described them as “non-conventional investments” or NCIs. NASD NTM 03-71 indicated that these products had “complex terms and features that are not easily understood." It warned its members that “[t]hese products also tend to have less market liquidity, less transparency as to their pricing and value and may entail significant credit risks that are difficult to understand and assess.”

SEC Enforcement Action - 1998, 2000 and 2003

On July 28, 1998, the SEC brought an administrative proceeding enforcement action against Piper Capital Management (PCM), an investment adviser, and Worth Bruntjen (Bruntjen), its portfolio manager. The SEC alleged that the defendants committed fraud by making false and misleading statements to investors regarding the risks associated with investing in the Piper Jaffray Institutional Government Income Portfolio fixed income mutual fund. In the Matter of Piper Capital Management et al., Admin. Proc. File No. 3-9657 (July 28, 1998). The fund had a stated investment objective of “a high level of current income consistent with the preservation of capital.”

The SEC alleged that, despite the fund’s conservative investment objective, the fund was in fact a high risk investment as a result of PCM’s and Bruntjen’s investment of the fund’s assets in interest rate-sensitive collateralized mortgage obligation derivatives.

The Initial Administrative Decision of the SEC Administrative Law Judge in the Piper Capital Management case was published on Nov. 30, 2000. The administrative law judge found liability on the part of Piper Capital Management and various individuals associated with the firm. The administrative law judge’s summary of the CMO market from 1991 through early 1994 is revealing:

3. Financial Market Climate and Circumstances

Interest rates affecting the CMO market declined from late 1991 through early 1994. Although the decline was steady throughout the period, it produced little volatility in the market. . . . Early in 1994, however, the Federal Reserve Board initiated a series of interest rate increases. These increases had a negative impact on CMO values. CMO securities and the funds holding them suffered significant losses.

The losses caused concomitant sell-offs, depressing values even further as CMO securities flooded the market. The situation turned critical when Askin Capital Management, Inc. (Askin), a large hedge fund manager, was unable to satisfy broker-dealer margin calls beginning on March 30, 1994. As a consequence, broker-dealers liquidated several hundred million dollars in CMOs from Askin’s funds, precipitating extreme price volatility and what generally is regarded as a “crash” in the CMO securities market.

The SEC affirmed the SEC Administrative Law Judge’s Piper Capital Management decision on Aug. 26, 2003. 56 S.E.C. Reports 1033 (Aug. 26, 2003). The Commission also noted the role that CMOs played in the performance of the Piper Jaffray Institutional Government Income Portfolio and commented on CMO market conditions in 1994.

Following the Fund’s increased investment in CMOs, its returns significantly increased and it received increased publicity. This in turn attracted a large influx of new investor money. Between January 1992 and September 1993, the Fund’s net assets increased by more than $500 million and the Fund broke multiple sales records.

However, as described in Section IV.B. below, in 1994, the CMO market collapsed, and the Fund suffered significant losses. . . . Id. at 1045.

The Wall Street Journal Article - 1994

The turmoil that the CMO market was experiencing in April 1994 was contemporaneously chronicled by The Wall Street Journal. On April 20, 2004, The Wall Street Journal published a story titled "Mortgage Derivatives Claim Victims Big and Small,” by Laura Jereski.

Ms. Jereski reported that rising interest rates had caused the mortgage-backed securities market to unravel unpredictably across the board because Wall Street dealers were becoming "reluctant to make markets in these esoteric securities because they're afraid of additional losses."

Jereski also reported that the reluctance of dealers to quote prices for many CMOs — out of fear that investors would demand to trade at those prices — had caused bid-offer spreads on these securities to widen to 10 points, or $100 on a bond with a $1,000 face value.

Asset-Backed Obligation and Mortgage-Backed Securities Prospectuses

The disclosures by issuers of mortgage-backed and asset-backed securities regarding the liquidity risks of these types of securities are fairly standard. Two examples of the typical liquidity disclosures contained in prospectuses of mortgage-backed and asset-backed securities owned by the Schwab YieldPlus Fund on July 31, 2007 are as follows:

Countrywide Home Loan, Series 2006-20, Class 1A36 Prospectus (Mortgage-Backed Security)

Secondary Market For The
Securities May Not Exist

The related prospectus supplement for each series will specify the classes in which the underwriter intends to make a secondary market, but no underwriter will have any obligation to do so. We can give no assurance that a secondary market for the securities will develop or, if it develops, that it will continue. Consequently, you may not be able to sell your securities readily or at prices that will enable you to realize your desired yield. The market values of the securities are likely to fluctuate. Fluctuations may be significant and could result in significant losses to you.

The secondary markets for mortgage backed securities have experienced periods of illiquidity and can be expected to do so in the future. Illiquidity can have a severely adverse effect on the prices of securities that are especially sensitive to prepayment credit or interest rate risk, or that have been structured to meet the investment requirements of limited categories of investors. (Emphasis supplied.) Prospectus at p. 10.

HFC Home Equity Loan Trust Series 2006-4 Prospectus (Asset-Backed Obligation)

Limited Liquidity may result in
delays in liquidations or lower
returns.

There will be no market for the securities of any series prior to its issuance, and there can be no assurance that a secondary market will develop, or if one does develop, that it will provide holders with liquidity of investment or that any market will continue for the life of the securities. One or more underwriters, as specified in the prospectus supplement, may expect to make a secondary market in the securities, but they have no obligation do so. Absent a secondary market for the securities you may experience a delay if you choose to sell your securities and the price you receive may be less than that which is offered for a comparable liquid security. (Emphasis supplied.) Prospectus at p. 1.

The SEC on numerous occasions has stated that, prior to making a recommendation to a customer, a broker-dealer and/or registered representative must: (1) have an adequate and reasonable basis for the recommendation based upon a reasonable investigation of that security; and (2) disclose to the customer material facts about the security which are known and are readily ascertainable, including adverse facts of which the broker-dealer or registered representative should be aware.

The U.S. Supreme Court has held that under the federal securities laws, an omitted fact is deemed to be material if there is a substantial likelihood that, taking into account all of the circumstances, the omitted fact would have assumed actual significance in the deliberations of a reasonable shareholder. Basic, Inc. v. Levinson, 485 U.S. 224 (1988).

State law definitions of what a material fact is can differ slightly from the U.S. Supreme Court’s definition. For example, a material fact under Florida state law is one of such importance that, but for the nondisclosure or misrepresentation, the complaining party would not have entered into the transaction.

Bank and securities regulators have been warning banks and broker-dealers since at least 1992 about the liquidity risks associated with mortgage-backed and asset-backed securities.

The demise of the Schwab YieldPlus Fund is directly related to the portfolio managers’ decision to maintain minimal cash equivalent securities available to satisfy shareholder redemptions, the fund’s overconcentration of its assets in potentially illiquid asset-backed and mortgage-backed securities and the fund’s distressed sales of these illiquid securities when substantial shareholder redemptions actually occurred.

Neither the Schwab YieldPlus Fund prospectuses nor any of Charles Schwab’s other communications with the public pertaining to the fund made any sort of equivalent disclosures regarding the liquidity risks of asset-backed and mortgage-backed securities. Neither did Schwab disclose the fund’s low levels of cash available to address the possibility of significant shareholder redemptions.

For more information, please contact attorney Chris Vernon of Vernon Healy by email at cvernon@vernonhealy.com or by phone at (239) 649-5390.