Schwab Winding Down Troubled YieldPlus Fund
Charles Schwab Corporation ( SCHW ) has decided to finally pull the plug from its proprietary YieldPlus family of funds. The fund family includes the Tax-Free YieldPlus and California Tax-Free YieldPlus funds besides the once extremely popular taxable YieldPlus fund. The decision clearly is an attempt by the company to salvage its reputation with customers who invested in the fund - which has cost Schwab more than $350 million in regulatory fines and legal settlements. Schwab continues to manage a combined $1.7 trillion in client assets and competes with other online brokerage, banking and financial services firms like E-Trade ( ETFC ), Ameritrade ( AMTD ), Wells Fargo ( WFC ) and Bank of America ( BAC ).
Our price estimate for Charles Schwab is $19.60 , implying a nearly 20% premium to the market price.
The Costly YieldPlus Fund
The YieldPlus fund took a beating during the global economic crisis of 2008 when a substantial part of its investments in mortgage-backed securities turned worthless, wiping out a substantial part of the fund's value.
To add to its woes, customers claimed that they had been misled by Schwab into investing in the fund. They held that Schwab significantly down-played the fund's risks by marketing it as a cash alternative. Backed by the SEC, the customers registered a class action suit against Schwab.
Moreover, the SEC also slapped fines on Schwab for allocating excessive funds to mortgage-backed securities issued by private companies without seeking shareholder approval.
Small Impact on Shares
Early this year, Schwab agreed to pay $119 million as fines to regulators. This is in addition to the $235 million it agreed to pay as settlement against the class-action suit filed by YieldPlus shareholders. These settlements have been the single largest factor dragging down Schwab's earnings figures in recent quarters. And individual claims continue to trickle in with another individual lawsuit decided against Schwab hardly a fortnight ago.
Schwab currently has assets worth slightly more than $200 million in the YieldPlus funds. It stopped all additions to the fund on 15th June, and the fund should be fully redeemed by August 22nd or slightly thereafter and proceeds distributed.
The assets being liquidated hardly affect the $200 billion total proprietary fund assets managed by Schwab and so the move has a negligible effect on our $19.60 price estimate for Schwab.