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Published: Wednesday, 4/21/2010

Schwab firm to pay $200M to settle suit on 'safe' fund


SAN FRANCISCO - Charles Schwab Corp. said yesterday it agreed to pay $200 million to settle claims that it misled investors on the amount of mortgage-backed securities held by its Schwab YieldPlus Fund.

Schwab signed a memorandum of understanding to settle the claims, filed in 2008, by paying the $200 million to plaintiffs without admitting liability, and it avoided trial, the company said in a statement. The settlement agreement cut the firm's first-quarter net income $105 million, bringing its net income reported last week down to $14 million.

The lawsuit alleged Schwab had incorrectly described the fund, once the world's largest short-term bond fund, as "safe." The plaintiffs sought damages of as much as $802 million, the estimate of losses made by their lawyers' experts. A trial was scheduled for May.

"We think it's a fair settlement, given the risks of the case," said Steve Berman, an attorney representing YieldPlus investors.

The shares climbed 1.2 percent to $19.28 at 1:13 p.m. New York time. They have risen 1.3 percent this year through yesterday, while the NYSE Arca Securities Broker/Dealer Index has gained 5 percent. On Jan. 4, Schwab's stock advanced to $19.78, a level last reached in November, 2008.

"The settlement removes the overhang that has been on the stock since charges were first brought forward in March, 2008," UBS analyst Alex Kramm wrote in a note to clients. Mr. Kramm said estimates of litigation-related costs were as high as $3 billion. "Discussions with investors suggested any settlement below a $300 million to $400 million range would likely be received as a positive," he said.

Schwab had denied wrongdoing, saying the fund's losses were caused by the collapse of the financial markets. This month U.S. District Judge William H. Alsup denied Schwab's bid to dismiss the case.

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