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Tuesday, July 17, 2012

SEC Settlement Costs Daifotis

Reported by Irene Park

The failure to properly describe a mutual fund in its prospectus is costing another Schwabbie a pretty penny. Kimon Daifotis has agreed pay $325,000 for misleading investors about the risks of investing in the Schwab YieldPlus Fund.

Daifotis' settlement follows a similar agreement made by Randall Merk in November. Merk agreed to pay $150,000 and entered into a permanent injunction along with 12-month suspension from the industry.

Neither Daifotis nor Merk admitted the allegations, nor did they deny them.

SEC staffers named Daifotis and Merk in their original complaint representing YieldPlus shareholders. The complaint also named Charles Schwab Investment Management (CSIM) and Charles Schwab & Co. (CS&Co.).

Regulators alleged in the complaint that Daifotis , then CIO and PM for the mutual fund, and Merk, then CSIM's president, underplayed the risks of investing in the YieldPlus Fund. At issue was whether they informed investors through the prospectus that the ultra-short bond fund had only slightly higher risk than a money market fund.

To settle the SEC's charges against him, Daifotis will pay $250,000 in disgorgement and a $75,000 civil penalty. He has also agreed to settle in a possible injunction where the SEC could bar Daifotis from associating with or working with any registered investment companies or related individuals.

The SEC also alleges that the PM claimed that the fund primarily held very short maturity bonds, when in fact most of its holdings had maturities of a decade or more in length.

At its peak, the fund held $13.5 billion in AUM for more than 200,000 shareholders, making it the largest ultra-short bond fund of its kind. But the fund crashed to $1.8 billion in eight months during the financial crisis of 2007 to 2008, and Schwab eventually shut down the mutual fund in late 2011.

Executives for CSIM and CS&Co. settled with the SEC in January 2011, agreeing to pay more than $118 million for charges of fraud.

Charles Schwab public relations staff members were not available for comment at publishing time. 

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