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U.S. Securities and Exchange Commission

U.S. SECURITIES AND EXCHANGE COMMISSION

LITIGATION RELEASE NO. 22163 / November 21, 2011

SEC v. KIMON DAIFOTIS AND RANDALL MERK, Civil Action No. CV-11-0137 WHA (N.D. Cal., filed Jan. 11, 2011)

FORMER EXECUTIVE AGREES TO INJUNCTION, PENALTY AND SUSPENSION TO SETTLE SEC CHARGES REGARDING SCHWAB YIELDPLUS FUND

The Securities and Exchange Commission today announced that Randall Merk consented to the entry of a permanent injunction, payment of a civil penalty, and a suspension in order to settle a Commission action related to the Schwab YieldPlus Fund. Merk was an Executive Vice President at Charles Schwab & Co., Inc., President of Charles Schwab Investment Management, and a Trustee of the Schwab YieldPlus Fund and other Schwab funds.

In January 2011, the Commission filed a complaint alleging that Merk and another official committed securities law violations in connection with the offer, sale, and management of the YieldPlus Fund. YieldPlus is an ultra-short bond fund that, at its peak in 2007, had $13.5 billion in assets and over 200,000 accounts, making it the largest ultra-short bond fund at the time. The fund suffered a significant decline during the credit crisis of 2007-2008 and saw its assets fall from $13.5 billion to $1.8 billion during an eight-month period.

According to the complaint, Merk misled or failed to inform investors adequately about the risks of investing in YieldPlus. The complaint also alleged that Merk approved other Schwab funds’ redemptions of their investments in YieldPlus at a time when he knew or was reckless in not knowing that a portfolio manager for those funds had received material, nonpublic information about YieldPlus without the authorization of the YieldPlus Fund’s board of trustees.

On November 21, 2011, the SEC filed a consent signed by Merk and a proposed final judgment against him. Without admitting or denying the Commission’s allegations, Merk consented to the entry of a final judgment permanently enjoining him from aiding and abetting violations of, or otherwise violating, Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The proposed final judgment also would enjoin Merk from future violations of Section 34(b) of the Investment Company Act of 1940, which prohibits the making of untrue statements of material fact, or material omissions, in documents filed with the Commission. Merk also agreed to pay a $150,000 civil penalty, which the Commission is seeking to have included in an existing Fair Fund for distribution to injured YieldPlus investors. The proposed judgment is subject to the Court’s approval.

If the Court enters the injunction, Merk also has agreed to settlement of a yet-to-be instituted administrative proceeding in which the Commission would suspend Merk for 12 months from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in any penny stock offering.

The Commission previously entered into a $118 million settlement with three Schwab entities regarding the YieldPlus Fund and another bond fund. See Press Release 2011-7 and Litigation Release No. 21806 (Jan. 11, 2011). Litigation continues against Kimon Daifotis, the former lead portfolio manager for the YieldPlus Fund and former Chief Investment Officer for Fixed Income for Charles Schwab Investment Management. See Litigation Release No. 21805 (Jan. 11, 2011).

 

http://www.sec.gov/litigation/litreleases/2011/lr22163.htm


Modified: 11/21/2011