Charles Schwab Accused of Breaking Securities Laws

​A national shareholder rights litigation firm, Schall Law Firm, declared on August 25 that it is looking into Charles Schwab Corporation on behalf of investors after the company was accused of breaking securities laws.

The focus of the investigation will be on whether Schwab made claims that were inaccurate and deceptive or omitted information that was important to investors.

As Fazzaco reported earlier in June, the Securities and Exchange Commission (SEC) charged three Charles Schwab investment adviser subsidiaries for not disclosing that they were allocating client funds in a manner that their own internal analyses showed would be less profitable for their clients under most market conditions.

According to the SEC order, Schwab's mandated disclosures for their robo-advisor, an AI-powered portfolio adviser was supposed to seek "optimal returns" through a "disciplined portfolio construction methodology." However, Schwab's own data revealed that, in the majority of cases, cash in the portfolios caused them to lose money while being exposed to the same risk.

Schwab profited from the robo-adviser portfolios by shifting the money to an affiliate bank, lending it out, and retaining the difference in earnings between the interest it received on the loans and the interest it gave to the robo-adviser clients.

Charles Schwab & Co., Inc., Charles Schwab Investment Advisory, Inc., and Schwab Wealth Investment Advisory, Inc., the three investment adviser companies of Charles Schwab, consented to a cease-and-desist order without making an argument. As a result, the company had to pay a $135 million civil penalty as well as $52 million in disgorgement and prejudgment interest.

To make sure that policies and processes are properly followed, Schwab decided to retain an outside consultant who will evaluate and advise their policies and procedures relating to their robo-disclosures.

​Finally, because this case has not yet been certified and the Schall Law Firm specializes in shareholder rights and securities class actions, it is uncertain how many investors will choose to sue Schwab for falsely promoting their AI adviser services.