Week Adjourned: 1.14.11

Top Lawsuits

Still Bugged by Similac…Remember the Similac recall in September? Well, a class action lawsuit was filed this week over the beetle-laden baby formula.

Plaintiffs, John L. and Jennifer M. O’Neil filed the suit against Abbott Laboratories Inc. (Delaware) and Abbott Laboratories, the makers of Similac baby formula, claiming that the Similac Isomil Sensitive formula they gave their two-month old baby in September made the child sick with diarrhea. So, they wisely switched formulas on the advice of their doctor, and low and behold their infant recovered.

At the end of September, Abbott issued a voluntary recall order after small common beetles were found at its Michigan manufacturing facility. The O’Neils claim that the products were contaminated to such an extent that their baby became ill, and consequently required medical treatment.

Heads-up—the proposed class includes consumers who purchased Similac Advanced, Similac Sensitive and Similac Go and Grow in 2010 and who fed the Similac product to infant children who then subsequently became sickened. 

Top Settlements

National City Bank Overdrew on Overdrafts…It looks like 2011 is going to be all about going after financial fraudsters—including banks. This latest settlement of a class action filed against National City Bank is no exception. In fact, it’s a preliminary $12 million settlement brought by National City customers who were fed-up with overdraft charges.

The lawsuit charged that National City, now owned by PNC, had reordered debit transactions in a manner that depleted available funds as quickly as possible to increase overdraft fees, improperly charged overdraft fees on debit card transactions, and provided false information about account balances.

Ringing any bells out there?

Settlement class members will receive $36 for each eligible overdraft charge incurred on debit transactions between July 2004 and August 2010, if the settlement receives final court approval. 

Charles Schwab Yields $18 Million to Investors of YieldPlus

The Financial Industry Regulatory Authority (FINRA) announced this week that it has ordered Charles Schwab & Company, Inc., to pay $18 million into a Fair Fund to be established by the Securities and Exchange Commission (SEC) to repay investors in YieldPlus, an ultra short-term bond fund managed by Schwab’s affiliate, Charles Schwab Investment Management. The $18 million consists of the $17.5 million in fees that Schwab collected for sales of the fund, plus a fine of $500,000, both of which will have been designated as restitution to customers.

This follows announcements that the US brokerage agreed to pay $119 million to settle claims that it misled investors. And the Securities and Exchange Commission also announced related civil fraud charges against two Schwab executives, alleging that they failed to inform investors about risks to the value of the fund, which collapsed during the crisis.

Sadly, dodgy securities appear to be in no short supply. The Schwab settlement, and earlier findings by FINRA against Lehman Bros and UBS could mark the beginning of a trend of settlements in favor of investors who were effectively robbed by brokerages that engaged in less than transparent dealings concerning sales of their various financial products.

FINRA’s investigation into YieldPlus found that despite changes in YieldPlus’ portfolio that caused the fund to be disproportionately affected by the turmoil in the mortgage-backed securities market, Schwab failed to change its marketing of the fund. In written materials and in conversations with customers, some Schwab representatives omitted or provided incomplete or inaccurate material information relating to the fund’s characteristics, risk and diversification, and continued to represent YieldPlus as a relatively low-risk alternative to money market funds and other cash alternative investments that had minimal fluctuations in net asset value (NAV).

FINRA found that in late August 2006, Schwab Investment’s Board of Trustees approved a proposal from YieldPlus’ fund manager to no longer classify non-agency mortgage-backed securities as an “industry” for purposes of the fund’s concentration policies. This change purportedly allowed the fund manager to increase the amount of non-agency mortgage-backed securities in the portfolio to greater than 25 percent of the fund’s assets. As a result, by February 2008, YieldPlus held over 50 percent of its assets in mortgage-backed securities, and about 40 percent in non-agency mortgage-backed securities.

FINRA found that Schwab’s investment management unit was aware of the changes in the fund’s portfolio and the significant increase in the percentage of the fund’s mortgage-backed securities holdings, but it failed to appreciate the concomitant increase in the risk of the fund and price volatility. Meanwhile, Schwab’s retail brokerage division did not change the way it marketed YieldPlus or the internal guidance it provided to its registered representatives.

The increased concentration in mortgage-backed securities caused YieldPlus to be severely impacted by the decline in the mortgage-backed securities market that began in the summer of 2007. YieldPlus’ NAV dropped significantly, falling from a high of $9.69 on Feb. 26, 2007, to $8.79 on February 29, 2008, a decline of 9.3 percent. 

It’s going to be an interesting year… 

Ok—That’s it for this week. See you at the Bar.

One thought on “Week Adjourned: 1.14.11”

  1. Will anyone ever really collect on those National City Bank settlements? Our lawyer told us in a suit against this bank that we could win on principle, but would never see any money.

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