Charles Schwab 2015 Annual Report Download - page 101

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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The Company also provides guarantees to securities clearing houses and exchanges under standard membership agreements,
which require members to guarantee the performance of other members. Under the agreements, if another member becomes
unable to satisfy its obligations to the clearing houses and exchanges, other members would be required to meet shortfalls.
The Company’s liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as
collateral. However, the potential requirement for the Company to make payments under these arrangements is remote.
Accordingly, no liability has been recognized for these guarantees.
Legal contingencies: The Company is subject to claims and lawsuits in the ordinary course of business, including
arbitrations, class actions and other litigation, some of which include claims for substantial or unspecified damages. The
Company is also the subject of inquiries, investigations, and proceedings by regulatory and other governmental agencies.
The Company believes it has strong defenses in all significant matters currently pending and is contesting liability and any
damages claimed. Nevertheless, some of these matters may result in adverse judgments or awards, including penalties,
injunctions or other relief, and the Company may also determine to settle a matter because of the uncertainty and risks of
litigation. Described below are certain matters in which there is a reasonable possibility that a material loss could be incurred
or where the matter may otherwise be of significant interest to stockholders. Unless otherwise noted, the Company is unable
to provide a reasonable estimate of any potential liability given the stage of proceedings in the matter.
With respect to all other pending matters, based on current information and consultation with counsel, it does not appear
reasonably possible that the outcome of any such matter would be material to the financial condition, operating results or
cash flows of the Company. However, predicting the outcome of a litigation or regulatory matter is inherently difficult,
requiring significant judgment and evaluation of various factors, including the procedural status of the matter and any recent
developments; prior experience and the experience of others in similar cases; available defenses, including potential
opportunities to dispose of a case on the merits or procedural grounds before trial (e.g., motions to dismiss or for summary
judgment); the progress of fact discovery; the opinions of counsel and experts regarding potential damages; potential
opportunities for settlement and the status of any settlement discussions; and potential insurance coverage and
indemnification. It may not be possible to reasonably estimate potential liability, if any, or a range of potential liability until
the matter is closer to resolution – pending, for example, further proceedings, the outcome of key motions or appeals, or
discussions among the parties. Numerous issues may have to be developed, such as discovery of important factual matters
and determination of threshold legal issues, which may include novel or unsettled questions of law. Reserves are established
or adjusted or further disclosure and estimates of potential loss are provided as the matter progresses and more information
becomes available.
Total Bond Market Fund Litigation: On August 28, 2008, a class action lawsuit was filed in the U.S. District Court for the
Northern District of California on behalf of investors in the Schwab Total Bond Market Fund™. The lawsuit, which alleges
violations of state law and federal securities law in connection with the fund’s investment policy, named CSIM, Schwab
Investments (registrant and issuer of the fund’s shares) and certain current and former fund trustees 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. Plaintiff seeks unspecified compensatory and rescission damages, unspecified equitable and
injunctive relief, costs and attorneys’ fees. Plaintiff’s federal securities law claim and certain of plaintiff’s state law claims
were dismissed. On August 8, 2011, the court dismissed plaintiff’s remaining claims with prejudice. Plaintiff appealed to the
Ninth Circuit, which issued a ruling on March 9, 2015 reversing the district court’s dismissal of the case and remanding the
case for further proceedings. A petition by defendants for U.S. Supreme Court review was denied on October 6, 2015. In the
interim, defendants filed a fourth amended complaint on June 25, 2015. Defendants moved to dismiss and on October 6,
2015, the court dismissed with prejudice plaintiff’s contractual claims, but declined to dismiss certain of the claims for
fiduciary breach. On February 23, 2016, the court dismissed plaintiff’s remaining claims with prejudice. Plaintiff has 30 days
in which to appeal.
Other Regulatory Matters: On April 16, 2012, optionsXpress, Inc. was charged by the SEC in an administrative proceeding
alleging violations of the firm’s close-out obligations under Regulation SHO (short sale delivery rules) in connection with
certain client trading activity. Following trial, in a decision issued June 7, 2013, the judge held that the firm had violated
Regulation SHO and aided and abetted fraudulent trading activity by its client, and ordered the firm and the client to pay