Randall Merk an Executive Vice President at Charles Schwab & Co., Inc., President of  Charles Schwab Investment  Management, and a Trustee of the Schwab YieldPlus Fund and other Schwab funds, agreed to settle SEC charges in connection with the offer, sale, and management of the YieldPlus Fund. SEC Allegations Against Merk. In January 2011, the Commission filed a complaint alleging that Merk and another official violated securities law in connection with the YieldPlus Fund.  YieldPlus is an ultra-short bond fund that, at its peak in 2007, had $13.5 billion in assets and over 200,000 accounts  - making it the largest ultra-short bond fund at the time.  The fund, however, suffered a significant decline during the credit crisis of 2007-2008 and its assets fell from $13.5bn to $1.8bn during an 8-month period. Merk allegedly misled or failed to inform investors adequately about the risks of investing in YieldPlus.  It's also alleged that he approved other Schwab funds’ redemptions of their investments in YieldPlus at a time when he knew or was reckless in not knowing that a portfolio manager for those funds had received material, nonpublic information about YieldPlus without the authorization of the YieldPlus Fund’s board of trustees.

e.g. - Merk and co-defendant Kimon Daifotis - who managed the YieldPlus fund and was CIO for fixed income at Schwab Investment Mgmt - described the fund as a cash equivalent or alternative that had only slightly higher risk than a money market fund in marketing and other communications.  [misleading, and inaccurate, as YieldPlus securities were riskier due to much different maturities and credit qualities]

In mid-2007, the YieldPlus Fund’s NAV began to decline and many investors redeemed their holdings. Unlike a money market fund, few of the fund’s assets were scheduled to mature within the next several months.  This forced the fund to sell assets in a depressed market to raise cash, which made the NAV decline even more pronounced.  During this time, Merk and Daifotis held conference calls, issued written materials, and had other communications with investors that contained a number of material misstatements and omissions concerning the fund.

e.g. - in 2 conference calls, Daifotis made false and misleading statements that the fund was experiencing “very, very, very slight” and “minimal” investor redemptions.  [in the 2 weeks prior to the calls, investors redeemed $1.2bn, which required the fund to sell over $2.1 billion of its securities.] Merk similarly authored, reviewed, approved misleading statements about the fund, like a false claim that the fund had a “short maturity structure” that “mitigated much of the price erosion” experienced by its peers.

Daifotis helped cause the YieldPlus Fund to deviate from its concentration policy by directing the Fund to invest more than 25% of its assets in private-issuer mortgage-backed securities.  This deviation requires shareholder approval.  In fact, Daifotis directed the fund to invest nearly 50% of its assets in private-issuer MBSs without the requisite shareholder approval.

SEC Sanctions. Randall Merk agreed to a $150,000 civil penalty, which the SEC will try and have included in an existing Fair Fund for distribution to injured YieldPlus investors.  The proposed judgment is subject to Court approval. If the Court enters the injunction, Merk also has agreed to settle a yet-to-be instituted administrative proceeding that calls for an agreed-upon 12-month suspension from associating with any B/D, IA, Muni Securities Dealer, and other financial entities, as well as from participating in any penny stock offering. Sanctions Against Schwab Entities, Merk's Co-Defendant. Three Schwab entities previously agreed to a $118mn penalty to settle SEC charges regarding the YieldPlus Fund and another bond fund.  [Press Release 2011-7] and [Litigation Release 21806, 1/11/11]. Litigation continues against Merk's Co-Defendant, Kimon Daifotis, who's the former lead portfolio manager for YieldPlus Fund, and former CIO for Fixed Income for Charles Schwab Investment Management. For further details, go to:   [Litigation Release 22163, 11/21/11] and [Litigation Release 21805, 1/11/11].