Ex-chief Investment Officer and Portfolio Manager for Schwab Yieldplus Fund Settle SEC Suit
The US Securities and Exchange Commission has accepted the settlement of Kimon P. Daifotis to a pending litigation that the SEC filed against him in early 2011. Daifotis was the former lead portfolio manager for the Schwab YieldPlus Fund, the Chief Investment Officer for Fixed Income for Charles Schwab Investment Management (CSIM), a Senior Vice President at Charles Schwab & Co., Inc. (CS&Co.) and an officer of Schwab Investments, the trust of which YieldPlus was a series.
Under the terms of the proposed settlement, he would be enjoined from future violations of certain provisions of the federal securities laws and would agree to pay a total of $325,000 in penalty and disgorgement. The proposed judgment is subject to the Court’s approval. Daifotis also agreed to settle an anticipated administrative proceeding in which the Commission would bar him from the securities industry based on the entry of the injunction, with the right to apply for reentry after three years. Entry of the injunction also would result in automatic ineligibility for Daifotis to hold certain positions associated with registered investment companies.
In its January 11, 2011, complaint, the Commission alleged that Daifotis and another official committed fraud and other securities law violations in connection with the offer, sale, and management of the YieldPlus Fund. YieldPlus was 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 in the category. 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 complaint, Daifotis misled investors about the risks of investing in the YieldPlus Fund. For example, in marketing and other communications, Daifotis misleadingly described the fund as having only slightly higher risk than a money market fund. The statements were misleading because the fund was significantly riskier than money market funds, and Daifotis failed to inform investors adequately about the differences between YieldPlus and money market funds. The complaint also charged that Daifotis falsely claimed that the Fund primarily held very short maturity bonds, when most of its holdings had stated maturities of a decade or more in length.
In mid-2007, the YieldPlus Fund’s NAV began to decline and many investors redeemed their holdings. The complaint alleged that, in an effort to stem the significant outflows from the fund, Daifotis held conference calls, issued written materials, and had other communications with investors that contained a number of material misstatements and omissions concerning the fund. For example, in two conference calls, Daifotis made false and misleading statements that the fund was experiencing “very, very, very slight” and otherwise minimal investor redemptions in August 2007.
In fact, YieldPlus had experienced redemptions of more than $1.2 billion, or about 10% of its assets under management, during the two weeks prior to the calls. Daifotis also misleadingly failed to disclose YieldPlus’s substantial holdings of securities backed by Alt-A mortgages even though he was highlighting the fund’s smaller holdings of securities backed by subprime mortgages, which had similar risks and were experiencing similar losses at the time.
The proposed final judgment also would enjoin Daifotis 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. Daifotis also agreed to pay $250,000 in disgorgement and a $75,000 civil penalty, which the Commission is seeking to have included in an existing Fair Fund for distribution to injured YieldPlus investors.
Daifotis also has agreed to settle an administrative proceeding to be instituted if the Court enters the injunction and in which the Commission would bar Daifotis 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. Daifotis would have a right to apply for reentry after three years. Moreover, under Section 9 of the Investment Company Act of 1940, entry of the injunction would make Daifotis ineligible to serve or act as an employee, officer, director, or investment advisor to, or to be otherwise associated with, registered investment companies.
CSIM, CS&Co. and Schwab Investments previously entered into a related settlement with the Commission that, among other things, required payment of over $118 million in disgorgement and penalty.