Charles Schwab & Co. announced the replacement of Kimon Daifotis, Schwab’s YieldPlus portfolio manager, one day after our legal team filed what appears to be the first investor arbitration claim that names Daifotis as an individual respondent.
Our claim, filed on June 12, 2008, asserts that Daifotis, one of Schwab’s most prominent fund managers, misrepresented the safety of Schwab’s YieldPlus Fund (SWYSX) whose total net assets plunged by $12 billion during the eight-month period ending April 1, 2008. Daifotis put increasing portions of the fund’s assets into risky mortgage-backed securities and put the fund at risk for a huge failure when the subprime lending credit crisis rocked Wall Street.
On June 13, 2008, Schwab Investments filed an amended prospectus with the Securities and Exchange Commission that discloses (page 29) that Daifotis, a Senior Vice President and the Chief Investment Officer–Fixed Income for Charles Schwab Investment Management, Inc., had been replaced as the senior portfolio manager responsible for the overall management of the Schwab YieldPlus Fund and four other Schwab fixed income funds. Mr. Daifotis’ replacement is Jeffrey Mortimer, CFA, who is also a Senior Vice President and the Chief Investment Officer for CSIM.
We have spoken with a number of Schwab YieldPlus Fund shareholders over the past month who are weighing their options with respect to which route they might wish to follow in attempting to recover their losses. Charles Schwab’s Client Advocacy Team appears to be proactively contacting Schwab YieldPlus Fund shareholders and making settlement offers to various individuals.
In evaluating your recovery options, a practical first step would be to contact the Client Advocacy Team to explore whether Charles Schwab might be willing to make a reasonable settlement offer to you and, if so, how much Charles Schwab willing to offer to you. The address and telephone number for the Charles Schwab Client Advocacy Team is as follows:
Charles Schwab & Co., Inc.
Client Advocacy Team
101 Montgomery Street
San Francisco, CA 94104-4104
(800) 468-3774
We are actively advising clients on how to best navigate this process to achieve the best results.
Some Schwab YieldPlus Fund shareholders are reporting to us that Charles Schwab Client Advocacy Team representatives are playing audiotapes of conversations that the shareholders had with Charles Schwab financial consultants or traders about the Schwab YieldPlus Fund when the shareholder initially communicated their orders to purchase the fund. It is our belief and opinion that these recorded conversations will support rather than detract from the strength of your potential claim against Charles Schwab because it is highly unlikely that Charles Schwab’s employees were even aware of the level of risk associated with purchasing the fund, much less able to disclose those risks to potential purchasers of the fund.
We are requesting that our prospective clients sign authorization letters instructing Charles Schwab to maintain custody, possession, and control of these taped conversations for production during discovery and use in the presentation of our clients’ claims in their arbitration hearings.
Another topic that is coming up frequently during settlement discussions between Schwab YieldPlus Fund shareholders and Charles Schwab Advocacy Team members is the issue of what is the proper measure of the shareholder’s damages in the fund. For purposes of arbitration or trial, valid ways to calculate damages include “recessionary damages” and “well-managed account damages.” However, for settlement discussions in these types of cases, discussions often revolve around “out of pocket losses” which ignores the time value of money and any reasonable investment return.
Not surprisingly, for settlement purposes, Charles Schwab appears to be focusing on its customers’ net out–of–pocket losses. These losses are calculated by subtracting the total cost of all Schwab YieldPlus Fund purchases (including reinvestment of monthly dividends back into the fund) from the total net sales proceeds realized by the liquidation of all Schwab YieldPlus Fund shares owned by the shareholder plus the dividends actually received by the shareholder (that is, those dividends that were not reinvested back into the fund).
Unfortunately, with respect to its out of pocket loss calculations, Charles Schwab appears to be improperly treating dividends reinvested back into the fund as distributions actually received by shareholders rather than money that was used to make additional purchases of the fund. We believe that, conceptually, Charles Schwab’s methodology is incorrect and can result in a significant error in Charles Schwab’s favor in the computation of your net out of pocket losses for settlement purposes.
Your Charles Schwab monthly statements for the months in which you sold your Schwab YieldPlus Fund shares contains Charles Schwab’s calculations of the amounts of your losses resulting from your sale(s) of Schwab YieldPlus Fund shares (Realized Gain or Loss on Investments Sold). You can also access this information for your account from the Schwab website.
For investors who reinvested their Schwab YieldPlus Fund dividends back into the fund, Charles Schwab’s Realized Gain or Loss on Investments Sold calculation appears to accurately reflect your total net out-of-pocket losses for settlement purposes. For investors who did not reinvest their dividends back into the fund, the number of dividends received would reduce their net out-of-pocket losses for settlement purposes.
Please feel free to contact Chris Vernon at F:P:Sub:Phone} if you wish to consult with either of us about any of the matters discussed above. We are in the process of signing up additional Schwab YieldPlus clients (generally those clients who lost more than $20,000 in the fund) and expect to be filing a number of new claims in the very near future.