Charles Schwab to pay clients $200 million

— Charles Schwab Corp. on Tuesday agreed to pay $200 million to investors who claimed the company had deceived them.

The company agreed to repay customers in its YieldPlus Fund, which the plaintiffs said deceived them about the nature of short-term investments that lost them a lot of money when the credit crisis struck.

Plaintiffs in the case had been claiming as much as $890 million in damages. Schwab did not admit liability under the settlement, which needs final court approval.

The deal nearly wiped out San Francisco-based Schwab’s first-quarter profit, reducing it from the $119 million, or 10 cents a share, that the company reported last week to $14 million, or 1 cent.

YieldPlus became a victim of the financial collapse in 2008. The fund lost heavily because of its holdings of mortgage-backed securities, which made up about half the portfolio.

After taking heavy losses, investors protested that the ultra-short bond fund had deceived investors about the underlying risks and liquidity issues associated with the mortgage-backed securities.

YieldPlus lost 35% in 2008 as the credit markets fell, and then an additional 10.5% in 2009, according to Morningstar Inc. data. The fund is up 0.3% so far this year.

Schwab said the settlement “allows the company to avoid the distraction and uncertainty of a trial, and the further possibility of a protracted appeals process.”

Schwab added that related regulatory issues and a California state law claim remain open. It is in discussions with the Securities and Exchange Commission regarding the case.

Mamudi writes for MarketWatch / McClatchy.