Articles Posted in Charles Schwab

Today, Charles Schwab agreed to end a long standing dispute over their customer’s right to participate in securities class action lawsuits. In a settlement reached with the Financial Industry Regulatory Authority (FINRA), Charles Schwab agreed to pay a $500,000 fine and refrain from including language in its customer agreements that would prevent customers from participating in class actions. Click here for our earlier blog post on this subject.

Brokerage firms have always included language in their customer agreements requiring all disputes to be resolved through FINRA’s securities arbitration program–with one exception: Customers were allowed to skip arbitration if a related securities class action lawsuit had been filed. Schwab’s recent settlement with FINRA preserves the status quo and maintains a customer’s right to either pursue an individual arbitration claim or join a class action.

Arbitration vs. Class Action

This is an update to our February 21, 2013, blog post: Charles Schwab Allowed to Prevent Customer Class Action Lawsuits.

Yesterday, a spokesperson for the Financial Industry Regulatory Authority (FINRA) announced that an appeal had been filed with the National Adjudicatory Council (NAC)–an internal appeal board that reviews initial decisions rendered in FINRA enforcement actions. However, an NAC decision may not put an end to this important issue because NAC decisions can be appealed to the Securities Exchange Commission (SEC).

If the FINRA ruling is ultimately upheld, brokerage firms will be able to prevent customer class action lawsuits and require all customers to pursue individual claims through FINRA’s securities arbitration program. A bar on class actions would have the greatest impact on investors with claims that are too small to pursue individually and also the legions of investors who are unaware that any wrongs have been committed until they receive notice that a class action lawsuit was filed on behalf of all affected investors.

Today, a Financial Industry Regulatory Authority (“FINRA”) hearing panel ratified Charles Schwab’s inclusion of a clause in their customer agreement that prevents customers from pursuing class action claims against the firm. After agreeing to pay $225 million to settle a class action lawsuit in connection with the beleaguered YieldPlus ultra short-term bond fund, Schwab promptly modified their customer agreement preventing customers from participating in class actions and requiring all disputes to be submitted to FINRA’s securities arbitration dispute resolution program. At this early stage, it is unclear whether FINRA’s Department of Enforcement will appeal the ruling. However, it is safe to assume that other brokerage firms may soon be following Schwab’s lead and amending their customer agreements to prevent class actions.

What Does This Mean for Investors?

According to a statement issued by Schwab, customers are better served through FINRA’s arbitration process because class action litigation is “cumbersome” and a “less effective” means of resolving disputes. Schwab is partially correct. As noted in a previous blog post, customers with meritorious cases may be able to recover a larger percentage of their losses in arbitration. See Securities Arbitration vs. Class Actions: Which is More Financially Rewarding?

Today, Charles Schwab & Co. and Charles Schwab Investment Management agreed to settle securities fraud charges filed by the Securities & Exchange Commission (SEC) stemming from the YieldPlus fund. The settlement included an agreement to pay $118 million into a “Fair Fund” which will be distributed to harmed investors. In a related matter, the Financial Industry Regulatory Authority (FINRA) entered into an agreement with Schwab for the payment of $18 million to investors that will also be included in the Fair Fund. The payment of Fair Fund distributions is subject to approval by the U.S. District Court for the Northern District of California.

The findings made by the SEC and FINRA are set forth in the following press releases:

SEC Press Release

The San Francisco Chronicle reported today that Charles Schwab plans to terminate their agreement to settle a class action lawsuit filed on behalf of shareholders in Schwab’s YieldPlus fund–an ultra-short-term-bond fund. According to the Chronicle, Schwab has already put half of the $235 million settlement amount in escrow with the remainder to be paid in January. A hearing on Schwab’s decision is scheduled for November 18.

Numerous YieldPlus investors elected to opt out of the class action in order to pursue an individual securities arbitration claim against Schwab to recover their losses. The opt out deadline was December 28, 2009. According to an April 21, 2010, article in the S.F. Chronicle, Schwab paid approximately $48 million to resolve individual customer arbitration claims while another 194 individual arbitration claims seeking $34 million in damages were still pending at the time of the Chronicle’s article.

Click here for all YieldPlus blog postings.

Investors who purchased the Schwab Yield Plus (SWYPX and SWYSX) money market funds, have until December 28, 2009, to decide whether to remain in the pending class action lawsuit or affirmatively “opt out” and pursue a securities arbitration claim. The following investors will be automatically included as class members if they do not take steps to opt out of the class action:

  1. Those that purchased the funds between November 15, 2006, and March 17, 2008;
  2. Those that purchased the funds between May 31, 2006, and March 17, 2008; and

In a regulatory filing today, San Francisco-based Charles Schwab reported that it received a Wells Notice from the Securities and Exchange Commission (SEC) for alleged securities law vioations regarding its Schwab YieldPlus and Total Bond Market Fund.

A Wells Notice is is not a finding of wrongdoing. It is letter from the SEC advising the recipient of the enforcement staff’s decision to recommend that the SEC bring enforcement proceedings against the recipient. The letter will specify the violations that the SEC staff believes to have occurred and the relief the SEC intends to seek and the forum in which the SEC intends to bring an action. The violations will be described in fairly general terms.

More Information:

A Notice of Pendency of Class Action was issued in the class action matter In re Schwab Corp. Securities Litigation currently pending in San Francisco federal court. Investors who purchased shares of the Schwab YieldPlus Fund that qualify as class members will be automatically included in the class action, unless they submit a request for exclusion from class membership. The court’s deadline for opting out is December 28, 2009. YieldPlus investors who opt out may want to consider pursuing a claim for their losses through arbitration before the Financial Industry Regulatory Authority (FINRA), as many investors have already done.

For more information, please click on the following links:

View Notice of Pendency of Class Action

Here is a bit of good news for investors with securities arbitration claims against 14 of the largest brokerage firms, including Merrill Lynch, Morgan Stanley Smith Barney and Wells Fargo. The Financial Industry Regulatory Authority (FINRA) has agreed to extend its year-old pilot program established to give investors the option to request an arbitration panel composed entirely of arbitrators that are not affiliated with the securities industry. Currently, a 3-person arbitration panel must include one industry arbitrator and two public arbitrators. The pilot program was created in response to criticism over whether an industry arbitrator, such as a stockbroker or branch manager, can act impartially when a customer is complaining about securities fraud or account mismanagement by their broker. I’ve participated in arbitrations with both good and bad industry arbitrators. The trouble is, allowing an industry arbitrator to sit on a panel gives the appearance of bias and takes away from the legitimacy of the proceedings. That should be reason enough to dump the industry arbitrator. My California securities law firm is in favor of the pilot program and we have been actively encouraging clients to participate whenever possible.

The brokerage firms who have agreed to participate in the pilot program are:

Ameriprise Financial Services Charles Schwab Chase Investment Services Citigroup Global Markets Edward Jones Fidelity Brokerage Services LPL Financial Merrill Lynch Morgan Stanley Smith Barney Oppenheimer Raymond James TD Ameritrade UBS Financial Services Wells Fargo Advisors / Wachovia Securities

A San Francisco federal judge has issued an order certifying a class action lawsuit against Charles Schwab & Co. alleging securities law violations in connection with Schwab’s beleaguered YieldPlus Fund. The parties are required to submit to the court by September 10, 2009, a proposed timeline for class members that want to opt out of the class action. An updated blog posting will be issued once the opt out deadline is known. Click here to view all YieldPlus blog postings.

Three Classes of Investors Are Included in the Class Action

The court’s order creates three different classes of plaintiffs. The three classes are:

  1. Yield Plus investors that acquired shares between November 15, 2006, and March 17, 2008.
  2. YieldPlus investors that acquired shares between May 31, 2006, and March 17, 2008.
  3. California residents who held shares in the YieldPlus fund on September 1, 2006.

YieldPlus investors not included in the above categories are excluded from the class action. However, investors omitted from the class still have the option of filing their own securities arbitration claim against Schwab to recover their YieldPlus losses. Unlike class actions, which must be pursued in court, individual claims must be submitted to arbitration before the Financial Industry Regulatory Authority (FINRA).