| 01 April 2010

A district judge in San Francisco ruled yesterday that Schwab (SCHW) did indeed violate YieldPlus fund's policiy when it shifted more than 25% of its funds into mortgage-backed securities.

Judge William H. Alsup ruled that, "It was an entire repudiation of a clear-cut definition that had become a fixture of the fund on which shareholders were entitled to depend for the safety of their savings."

Schwab filed an argument to stop the SEC from suing the firm on March 24th. Schwab argued that the use of the word "industry" didn't apply in this case.  While the original 1999 registration statement for the fund said they wouldn't concentrate in any particular industry, Schwab amended the prospectus in 2006 to say that it didn't consider mortgage-backed securities an "industry."

The YieldPlus Fund cratered in 2008 after the fund lost 35%. Not a big deal for a leveraged ETF, but a problem for a fund that touted itself as "safe as a money market."

Since that time investor withdrew nearly all of its (once) $13.5 billion and have lined up to sue the company for retribution. We reported on a few of the early cases, but stopped after they started rolling in with regularity.

This ruling affects California shareholders only. An attorney for California investors puts potential damage estimates at at least $150 million. Nationwide estimates put potential damages at nearly $1 billion.

Schwab intends to defend itself in a trial and a representative told Bloomberg in an email, "We look forward to putting all the facts, evidence and expert testimony to the jury and presenting a strong case at trial."

In a seperate case, TD Ameritrade (AMTD) recently fulfilled the terms of its settlement with the SEC by repurchasing $304 million in Auction-Rate securities from investors. Schwab, facing similar prospects, decided to fight the SEC on auction-rate securities rather than settle.