SEC to Sue Schwab Over Bond Funds Holding Mortgage Securities

The Securities and Exchange Commission has issued a Wells notice to Charles Schwab informing the company it plans to sue it over two bond funds that held mortgage securities since the company marketed the funds as safe, high-yielding alternatives to money market funds.

The two funds are the Schwab YieldPlus and the Schwab Total Bond Market funds. More than a quarter million YieldPlus shareholders brought a class-action lawsuit against the YieldPlus fund in August. That fund held more than $13 billion in assets at its peak in May 2007, but as investors learned of its exposure to mortgage securities and its steep losses, investors ran for the exits. In March 2008, it has only $2.5 billion in assets, and it stands at $210 million today. The fund lost 35.4% in 2008 and 10.7% so far this year.