NEW YORK, Feb 3 (Reuters Legal) - Charles Schwab Corp has now paid the price for the drawn-out YieldPlus suit, its chairman said on Thursday, calling the episode a "pimple" on the record of the fund manager and discount brokerage.
Last month, the company agreed to pay a $119 million settlement after regulators charged it with hiding from investors the risks in its YieldPlus mortgage-bond mutual fund.
"We had one little pimple and that was the YieldPlus ... and that was simple an issue of liquidity and people all wanting out of the door at the same moment," Chairman Charles Schwab said at a quarterly business update.
"Any time everyone wants to get out at the same moment ... that door gets pretty narrow. So we've paid our price for that -- maybe a whole lot more than I wanted to pay -- but we have it behind us."
The company also expects higher expenses and revenue in 2011, as it absorbs the recent purchase of Windhaven Investment Management and ramps up spending and new projects, such as launching independent branches across the United States to attract new clients.
Depending on U.S. interest rates and trading volumes, expenses could rise between 8 percent to 10 percent from last year, while revenue could rise between 10 percent to 25 percent, Schwab forecast on Thursday.
Analysts on average expected Schwab to log a 15 percent rise in revenue this year, to $4.87 billion, according to Thomson Reuters I/B/E/S.
Money market fee waivers should also rise in coming quarters compared with the previous two, if U.S. interest rates stay near zero, the company added. The waivers are meant to ensure that clients do not lose money on their investments.
Schwab expects to waive about $115 million in the first quarter and potentially again in following quarters, up from $102 million in the fourth quarter and $93 million in the third quarter, Chief Financial Officer Joe Martinetto said at a quarterly business update.
The Securities and Exchange Commission announced the settlement last month and filed a civil lawsuit charging two Schwab executives, Kimon Daifotis and Randall Merk, with violating securities fraud laws over how the Schwab YieldPlus fund was marketed.
Schwab said last month it expects a $97 million fourth-quarter after-tax charge for its settlement, which it said resolves related proceedings by the Financial Industry Regulatory Authority (FINRA) and Illinois regulators.
The cases are SEC v. Charles Schwab Investment Management Inc et al, U.S. District Court, Northern District of California (San Francisco), No. 11-cv-0136 and SEC v. Daifotis et al, No. 11-cv-0137 in the same court. The complaints list David Gottesman, Frederick Block, Antonia Chion, Robert Cohen, Melissa Hodgman and David Mendel as counsel for the SEC. Schwab's FINRA letter of acceptance regarding the settlement lists Neal Sullivan of Bingham McCutchen in Washington, D.C. as counsel for Schwab. Daifotis is represented by David Bayless of Covington & Burling in San Francisco. Merk is represented by Susan Brune of Brune & Richard in New York.
The settled investor suit was In Re Charles Schwab Corp Securities Litigation, U.S. District Court, Northern District of California (San Francisco), No. 08-01510. Court filings listed Hagens Berman Sobol Shapiro in Berkeley, California, and Seattle, Washington, as counsel for the lead plaintiff YieldPlus Investor Group. Quinn Emanuel Urquhart & Sullivan in New York, Los Angeles and San Francisco were listed as counsel for Schwab alongside Covington & Burling in San Francisco.
(Reporting by Jonathan Spicer of Reuters; Additional reporting by Andrea Evans of Reuters Legal)