Charles Schwab (SCHW)

Assets under management in 2 share classes of YieldPlus bond funds was approx 12.5 billion. Now fund assets are at approx $1.5 billion. This means EPS will be lower approx $0.03 cents per share or $39M total lost revenue with loss management fee of 0.30% on the funds. These losses do not include any loss reserves needed to offset shareholder lawsuits which are underway.

On Sept 3, 2010, a class action lawsuit was filed on behalf of investors in the Charles Schwab Total Bond Market Fund (SWLBX), which allegedly suffered substantial losses after managers deviated from the stated investment strategy by relying heavily on high-risk residential mortgage-backed securities.

This suit follows the YieldPlus Case, which caused assets under management in the YieldPlus Bond fund to drop from $12.5 billion to $1.5 billion.

We can expect to see a similar trend with the Total Bond Market Fund.

U.S. District Judge William Alsup ruled that Charles Schwab Corp violated federal law when it failed to get approval from shareholders of its YieldPlus SWYSX.O mutual fund before placing about half of the fund's assets into uninsured mortgage-backed securities. Assets in the fund have fallen to $181 million from a 2007 peak above $13 billion. YieldPlus investors are seeking to recover $970 million of damages resulting from fund's exposure to collapsing housing and credit markets.

This ruling could spark a wave of suits against banks who exposed their investors to risky CDOs and mortgage backed securities that dropped in 2008 and 2009.

Bank of America (BAC) and Wells Fargo (WFC) have added serious fuel to the commission price wars by offering free trades to many of its clients. Bank of America alone has banking relationships with 50% of all U.S. households.

Schwab’s strong performance in growing its asset base may not be sustainable, as its assets grew as a function of astrong market environment and heavy advertising of its products.