UPDATE 4-Schwab in $119 mln SEC accord, two execs charged

* Schwab to pay $118.9 million, take 4th-qtr charge

* No admission of wrongdoing

* Schwab shares edge lower
(Recasts; adds lawyer’s comment, details of penalty)

By Jonathan Stempel

NEW YORK, Jan 11 (BestGrowthStock) – Charles Schwab Corp (SCHW.N: )
will pay $118.9 million to settle regulatory charges that it
hid from investors the mortgage-related risks in a seemingly
safe, multibillion-dollar bond mutual fund.

The U.S. Securities and Exchange Commission announced the
settlement and filed a civil lawsuit charging two Schwab
executives, Kimon Daifotis and Randall Merk, with violating
securities fraud laws over how the Schwab YieldPlus (SWYSX.O: )
fund was marketed.

Schwab, a discount brokerage and fund company, expects a
$97 million fourth-quarter after-tax charge for its settlement,
which it said resolves related proceedings by the Financial
Industry Regulatory Authority and Illinois regulators.

The $118.9 million payment includes fines totaling $57.3
million and will be used for restitution to investors.

YieldPlus had about $13.5 billion of assets in more than
200,000 accounts in 2007, making it the largest “ultra-short”
bond mutual fund at the time.

But it suffered a total return of negative 42 percent in
2008 and 2009 as the credit crisis caused riskier investments
it held to lose value or become illiquid.

Redemptions fueled the decline, as assets fell to $1.8
billion from $13.5 billion in just eight months, the SEC said.

Tuesday’s settlement follows approval last Nov. 24 by U.S.
District Judge William Alsup of a $235 million agreement by San
Francisco-based Schwab to settle a lawsuit by investors who
said they lost $970 million by investing in the fund.

The SEC settlement requires court approval. Its civil case
against Daifotis and Merk seeks fines and other remedies.


Many fund companies marketed ultra-short funds as a safe
alternative to money market funds and other cash equivalents.

The SEC said Schwab marketed YieldPlus in this manner, but
nonetheless put about half the fund’s assets into
private-issuer mortgage-backed securities, twice the maximum
allowed, without getting required shareholder approval.

It accused Daifotis, a former chief investment officer for
fixed income, in conference calls falsely said the fund was
suffering “very, very, very slight” or “minimal” redemptions.

The SEC also said Merk, an executive vice president,
approved statements suggesting the fund was structured to avoid
large principal losses.

“All financial firms and professionals, including large
mutual fund providers, must be vigilant in accurately
describing the risks of the products they sell to the public,
especially the widely-held mutual funds that are the
bread-and-butter investments of retail investors,” SEC
enforcement chief Robert Khuzami said in a statement.

Schwab did not admit wrongdoing, and in a statement said it
“would never seek to profit” at clients’ expense.

Daifotis will defend against the SEC lawsuit, his lawyer
David Bayless said in an interview.

“He didn’t do anything wrong, had no incentive to commit
the fraud the SEC suggests, and invested a significant amount
of his own money in the fund,” Bayless said. “He has been a
shareholder from day one and never sold a single share.”

Merk will also fight the lawsuit, which is “not supported
by the actual evidence,” his lawyer Susan Brune said in a

Schwab had in October 2009 received a “Wells notice” from
the SEC indicating possible civil charges in the case.

In afternoon trading, Schwab shares were down 3 cents at
$17.92 on the New York Stock Exchange.

The case is SEC v. Daifotis et al, U.S. District Court,
Northern District of California.
(Reporting by Jonathan Stempel in New York, editing by Matthew
Lewis, Gary Hill)