In one of the most substantial settlements to date to arise out of the subprime-related securities litigation wave, the parties to the consolidated Schwab YieldPlus securities class action lawsuit have reached an agreement to settle the case for $200 million, according to an April 20, 2010 press release from The Charles Schwab Corporation. The parties’ settlement arises in the wake of several recent summary judgment rulings in the case and in advance of a looming May 10, 2010 trial date.


The proposed settlement is subject to definitive agreement and court approval. The settlement also does not include certain state law claims the plaintiffs had asserted, as well as other regulatory claims.


The plaintiffs had filed several class action complaints in 2008 that were later consolidated. As reflected in the plaintiffs’ second amended complaint, the plaintiffs alleged that Schwab and related entities, as well as certain Schwab directors and officers, violated federal and state securities laws and other state laws in representations made about Schwab’s YieldPlus Fund, a short-term fixed income mutual fund.


Essentially, the plaintiffs alleged that the defendants misled investors when they described the Fund as a safe alternative to cash which had "minimal" risk of a fluctuating share price. The plaintiffs allege that the Fund was not "stable" or "safe" because it was comprised of assets that were riskier than represented. Specifically, the plaintiffs alleged that the assets held by the Fund were of longer duration than represented. The plaintiffs also alleged that the asset allocation disclosures and the description of the Fund’s concentration in illiquid securities were inconsistent with the Fund’s significant and increasing concentration in mortgage-backed securities.


The plaintiffs allege that by extending the average duration of the portfolio and by investing in between 46% to 50% of portfolio assets in mortgage-backed securities, the defendants caused the Fund and its shareholders to incur billions of dollars in losses. The complaint alleges that the Fund’s shareholders lost up to 36% of their "supposedly safe cash investment."


Northern District of California Judge William Alsup had recently issued a series of orders substantially denying the defendants’ motions for summary judgment. In a March 30, 2010 order (here), Judge Alsup denied the defendants’ motion for summary judgment and granting plaintiffs’ motion for summary judgment as to plaintiffs’ claims under the Investment Company Act of 1940. In an April 8, 2010 order (here), Judge Alsup substantially denied defendants’ motions for summary judgment on ’33 Act disclosure issues and loss causation issues. In a separate April 8, 2010 order (here), Judge Alsup substantially denied the individual defendants’ motion for summary judgment as to the plaintiffs’ Section 12 claims and certain state law claims. Trial in the case had been set to begin on May 10, 2010.


In its April 20 press release, the company stated that it increased its contingency reserve relating to the case an additional $172 million pre-tax (beyond the $11 million the company had previously accrued in the wake of the March 30 summary judgment ruling) an amount which is "net of expected insurance coverage."


The proposed settlement of the Schwab YieldPlus Fund securities suit is the second largest settlement yet to arise out of the subprime-related securities litigation wave, exceeded only by the massive January 2009 settlement in the Merrill Lynch subprime-related securities lawsuit (about which refer here). In addition, according to reliable sources, this settlement is the fourth largest securities settlement in the Ninth Circuit and the second largest for a noninstitutional lead plaintiff.


The size of the settlement undoubtedly is a reflection of the looming trial date and recent adverse summary judgment rulings, as well as the size of the losses claimed by the plaintiff class. While many of these factors are case specific, this settlement could nevertheless potentially cast a significant shadow across the huge number of remaining subprime-related securities lawsuits. The fact that the case involved a mutual fund may also present its own differentiating characteristics, but plaintiffs may nevertheless seek to rely on fact and amount of this settlement in other cases.


There has been a certain amount of publicity recently about how the plaintiffs may be faring poorly in the subprime related securities litigation, at least at the motion to dismiss stage. At a minimum, the sheer magnitude of this settlement suggests the enormous stakes that may be involved in the subprime-related securities lawsuits – at least those that survive initial pleading hurdles.


I have in any event added the Schwab settlement to my running tally of subprime and credit crisis-related lawsuit case resolutions (including dismissal motion rulings), which can be accessed here.


An April 20, 2010 Business Week article discussing the settlement can be found here. A Net Worth Plus blog post about the settlement can be found here.


Special thanks to  Reed Kathrein  of the Hagens Berman firm, which is lead plaintiffs’ counsel in the YieldPlus lawsuit, for providing me with copies of the summary judgment motion rulings.