| 21 April 2010

We've given The Charles Schwab Corporation (SCHW) a hard time for their YieldPlus fund debacle. We wrote about jury awards in July. We reveled in the details of a report on the fund's implosion. And we made fun of Schwab lawyers disputing the meaning of the word "industry."

Through it all there's just one thing we asked for and that was, quite simply, a mea culpa. The manager of this fund screwed up. But instead of cleaning up the mess, Schwab lawyers reacted to the onslaught with tai chi-like effectiveness, blaming market forces for the problems and expertly deflecting the issue of sales tactics.

Schwab, it seems, has made a habit of fighting scrutiny and error tooth-and-nail. Like a well-crafted Lloyd Blankfein vociemail, the Schwab response has been a consistent: "it's not us, it's you."

There's no better case of pointing the finger than with the Auction-Rate Securities case. Don't blame us, said Schwab. It's the underwriter's fault. (Unfortunately for Schwab, NY Attorney General Andrew Cuomo disagrees.) TD Ameritrade, by comparison, was quick to settle up with the SEC and move on.

After a time, however, these fights start to backfire on you. They drag on and -- guilty or not -- cast a negative pall over the organization. The Schwab team is smart enough to recognize this -- but more than that, when it comes time to move, they really know how to play it.

Take, for example, the timeline of events in the YieldPlus case. Schwab announced earnings last Friday, which we analyzed here. Net income dropped 45%, sure, but core metrics looked good. Then they announce the YieldPlus settlement yesterday. Which just so happens, by the by, to be the same day that their competitor, TD Ameritrade announced their earnings.

To be clear, when a settlement is announced, however large (and this one was large), shareholders breathe a sigh of relief. The heavy weight of uncertainty has been lifted from the organization. And in fact, Schwab announced that the $200mm payout will be retroactively taken out of their Q1 earnings. Taking into account a contingency reserve of $172 million this reduced their Q1 net income by $105 million, or down to about break-even.

The impact? Feel-good stories, like this one about a female Iranian comedian, are making their way around the Interweb. The stock is currently up about 2.5% since Friday's close. (TD Ameritrade, by compariso, is trading up about $0.25, or 1.5%.) And Q2, here we come!

Today, Schwab deftly pushed the news of the settlement down a few notches in the news cycle with a new release about the results of their 2010 Family and Money Survey.

While the drama is not over -- the California case is set to go to trial May 10 and some 194 individual arbitration claims have yet to be settled -- Schwab set the tone and pushed aside the largest of the potential problem cases. We'll eagerly watch the next round and, in fact, fully expect to hear that the firm has reached a settlement with the State of California in a matter of days.

While you may be grumbling that shareholders will only collect about 23 to 25 percent of their losses after attorney's fees it's important to put this into perspective. As Kathleen Pender of the SF Chronicle points out in her article, 23-25 percent is much better than the 4% average that shareholders typically collect.

While not quite the mea culpa we hoped for it is, like we said, well played, sir.