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Charles Schwab’s legal settlement almost wipes out first quarter profit

US Brokerage Charles Schwab yesterday agreed to pay $200m to settle a federal class-action lawsuit related to a money-losing bond mutual fund, erasing nearly all of its first quarter profit.

Schwab in March 2008 became the target of litigation and regulatory probes focused on its YieldPlus Fund, a short-duration bond fund that plunged in value following the 2007 credit crisis.

The settlement forces the discount brokerage to restate first-quarter results that were announced last Thursday. Schwab said it increased its contingency reserve by $172m pre-tax, reducing first quarter profit by about $105m, or nine cents a share.

That nearly wipes out the $119m of reported profit, or 10 cents a share. Schwab previously had set just $11m aside for potential liability after a summary judgment ruling of liability was issued 30 March with respect to a California state lawsuit.

The settlement is preliminary and subject to a definitive agreement as well as court approval. Related regulatory probes and the California lawsuit remain ongoing. Schwab did not admit wrongdoing.

Schwab yesterday said it would continue to evaluate the size of its contingency reserve pending the final resolution of the class-action suit, and warned its total liability related to YieldPlus could be still higher.

The company says it cannot estimate its liability related to regulatory probes, and so has not established a reserve.