Charles Schwab 2011 Annual Report Download - page 100

THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
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lawsuit, which alleges violations of state law and federal securities law in connection with the fund’s investment policy,
names Schwab Investments (registrant and issuer of the fund’s shares) and CSIM as defendants. Allegations include that the
fund improperly deviated from its stated investment objectives by investing in collateralized mortgage obligations (CMOs)
and investing more than 25% of fund assets in CMOs and mortgage-backed securities without obtaining a shareholder vote.
Plaintiffs seek unspecified compensatory and rescission damages, unspecified equitable and injunctive relief, and costs and
attorneys’ fees. Plaintiffs’ federal securities law claim and certain of plaintiffs’ state law claims were dismissed in proceedings
before the court and following a successful petition by defendants to the Ninth Circuit Court of Appeals. On August 8, 2011,
the court dismissed plaintiffs’ remaining claims with prejudice. Plaintiffs have appealed to the Ninth Circuit, where the case is
currently pending.
A second class action lawsuit filed on September 3, 2010, in the U.S. District Court for the Northern District of California,
which raised similar allegations on behalf of investors in the fund (Smit lawsuit), was dismissed with prejudice on April 19,
2011.
optionsXpress Merger Litigation: Between March 21, 2011 and April 6, 2011, ten purported class action lawsuits were filed
by optionsXpress stockholders challenging the terms of the Company’s merger agreement to acquire optionsXpress. Named
defendants included the Company, optionsXpress and members of its board of directors. Seven lawsuits were filed in the
Circuit Court of Cook County, Illinois and consolidated in a single amended complaint on May 9, 2011 (Consolidated Illinois
Action); and three lawsuits were filed in the Court of Chancery of the State of Delaware and consolidated in a single amended
complaint on April 25, 2011 (Consolidated Delaware Action). On April 28, 2011, the Delaware court stayed the Consolidated
Delaware Action in favor of the Consolidated Illinois Action.
On June 16, 2011, the Illinois court dismissed all claims against the Company with prejudice. On July 29, 2011, the parties
entered into a settlement agreement under which the remaining defendants agreed to provide certain supplemental merger
disclosures in exchange for full releases of all claims related to the merger, including all claims in the Consolidated Illinois
Action and the Consolidated Delaware Action. Defendants also agreed not to oppose any fee application by plaintiffs’ counsel
that did not exceed $650,000. The settlement received final approval from the Illinois court on December 7, 2011.
optionsXpress Regulatory Matters: The Company is in discussions with the Securities and Exchange Commission (SEC), the
Chicago Board Options Exchange and FINRA to resolve several optionsXpress regulatory matters which predate the
Company’s acquisition of optionsXpress. optionsXpress entities and individual employees have received Wells notices
concerning potential violations of SEC Regulation SHO (short sale delivery rules) in connection with certain customer trading
activities, and potential violations of the broker-dealer registration requirements in connection with an unregistered
optionsXpress entity. The Company has recorded a contingent liability associated with these matters, which was not material
at December 31, 2011.
YieldPlus Fund Litigation: As disclosed previously, the Company recorded total charges in 2010 of $199 million, net of
insurance proceeds of $39 million under applicable policies, for settlements to resolve consolidated class action litigation in
the U.S. District Court for the Northern District of California relating to the Schwab YieldPlus Fund. On April 19, 2011, the
court granted final approval of the settlement agreements and entered final judgment in the litigation.
16. Financial Instruments Subject to Off-Balance Sheet Risk, Credit Risk, or Market Risk
Securities lending: The Company loans client securities temporarily to other brokers in connection with its securities lending
activities and receives cash as collateral for the securities loaned. Increases in security prices may cause the fair value of the
securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does
not return the loaned securities or provide additional cash collateral, the Company may be exposed to the risk of acquiring the
securities at prevailing market prices in order to satisfy its client obligations. The Company mitigates this risk by requiring
credit approvals for counterparties, by monitoring the fair value of securities loaned, and requiring additional cash as
collateral when necessary. The fair value of client securities pledged in securities lending transactions to other broker-dealers
was $783 million and $1.2 billion at December 31, 2011 and 2010, respectively. Additionally, the Company borrows