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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

IN RE: 

CHARLES SCHWAB CORPORATION

SECURITIES LITIGATION.

This Document Relates

To All Cases.

 /

No. C 08-01510 WHA

ORDER REGARDING

DEFENDANTS’ MOTIONS

FOR SUMMARY JUDGMENT

REGARDING SECTION 12

AND SECTION 17200 CLAIMS

INTRODUCTION

In this securities class action, plaintiffs allege that defendants violated Section 12 of the

Securities Act of 1933 and California Business & Professions Code Section 17200. 

Defendants Mariann Byerwalter, Donald F. Dorward, William A. Hasler, Robert G. Holmes,

Gerald B. Smith, Donald R. Stephens, and Michael W. Wilsey, who were employees of Charles

Schwab Corporation and independent trustees of Schwab Investments (collectively,“independent

trustees”), move for summary judgment on the Section 12 and Section 17200 claims. 

Defendant Kimon Daifotis separately moves for summary judgment as well. Material issues

of fact exists with regard to whether the independent trustees and defendant Daifotis solicited

investors. For the reasons that follow, the independent trustees’ motion is DENIED IN PART and

GRANTED IN PART, and defendant Daifotis’ motion is DENIED.

STATEMENT

This action originated as multiple independent class actions filed by investors in

Schwab’s YieldPlus Fund, a short-term fixed-income mutual fund. These actions were

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consolidated into the present class action with six lead plaintiffs: Kevin O'Donnell, James

Coffin, John Hill, David and Gretchen Mikelonis, and Robert Dickson. Gretchen Mikelonis has

since withdrawn as a lead plaintiff. Plaintiffs bring this action against several Schwab corporate

entities, officers and employees of those entities, and trustees of Schwab Investments who signed

the registration statements at issue.

Defendant Charles Schwab Corporation was the parent corporation of the Charles

Schwab financial services complex. Charles Schwab & Co., Inc. (“CS&Co.”) was the parent

company of Schwab Investments and was the principal underwriter and distributor for shares of

the fund. Charles Schwab Investment Management, Inc. (“CSIM”) was the asset management

arm of the Charles Schwab Corporation; it oversaw the asset management and administration of

the fund. Schwab Investments, a business trust organized under the laws of Massachusetts, was

the registrant for the fund, the issuer of fund shares and performed trust services for the fund. 

Defendant Kimon Daifotis was the head of fixed income portfolio management at Schwab

Management. The independent trustees signed the registration statements at issue. 

Schwab YieldPlus Fund was an open-ended mutual fund organized as a Massachusetts

business trust registered under the Investment Company Act. It offered two classes of shares: 

Investor Shares and Select Shares. The latter had a higher minimum investment requirement,

but lower fees compared to the former.

Plaintiffs allege that defendants violated Section 12(a)(2) of the Securities Act of 1933

by misleading investors when they described the YieldPlus Fund as an “ultrashort” bond fund

that was a safe alternative to cash and which had “minimal” risk of a fluctuating share price. 

Plaintiffs allege that the fund was not an ultrashort bond fund, was not “stable,” and was not

“safe,” because it was comprised of assets that were not truly short-term in nature and were

otherwise riskier than represented. Plaintiffs also allege that the true risks presented by the

fund’s assets were eventually revealed and, as a result, investors suffered losses.

Additionally, plaintiffs allege a state law claim under Section 17200 of California’s

Business and Professions Code against the independent trustees. Plaintiffs allege that the

independent trustees violated the YieldPlus Fund’s policy not to concentrate investments in a

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particular industry or group of industries when they invested over 45% of the YieldPlus Fund’s

assets in mortgage-backed securities without first obtaining a majority vote of shareholders, in

violation of Section 13(a) of the Investment Company Act of 1940. Plaintiffs allege that this

investment also violated Section 17200.

A previous order (Dkt. No. 233) certified three classes of plaintiffs. Of the two separate

federal classes, one is a Section 12 class. The Section 12 class includes “all persons or entities

who acquired shares of the fund traceable to a false and misleading prospectus for the fund who

were damaged thereby.” The class period for the Section 12 class is May 31, 2006, through

March 17, 2008.

The independent trustees seek summary judgment on plaintiffs’ second and fourth claim

as against them. The second claim asserts that the independent trustees violated Section 12 of

the Securities Act of 1933. The fourth claim asserts that the independent trustees violated

Section 17200 of the California Business and Professions Code. Defendant Daifotis seeks

summary judgment on plaintiffs’ second claim, which asserts that he violated Section 12 of the

Securities Act of 1933.

ANALYSIS

1. LEGAL STANDARD.

Summary judgment is granted when “the pleadings, depositions, answers to

interrogatories, and admissions on file, together with the affidavits, if any, show that there is

no genuine issue as to any material fact and that the moving party is entitled to a judgment as a

matter of law.” FRCP 56(c). A district court must determine, viewing the evidence in the light

most favorable to the nonmoving party, whether there is any genuine issue of material fact. 

Giles v. General Motors Acceptance Corp., 494 F.3d 865, 873 (9th Cir. 2007). A genuine issue

of fact is one that could reasonably be resolved, based on the factual record, in favor of either

party. A dispute is “material” only if it could affect the outcome of the suit under the governing

law. Summary judgment is not granted if the dispute about a material fact is “genuine” — that

is, if the evidence is such that a reasonable trier of fact could return a verdict for the nonmoving

party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248–49 (1986).

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The moving party “has both the initial burden of production and the ultimate burden of

persuasion on a motion for summary judgment.” Nissan Fire & Marine Ins. Co., Ltd. v. Fritz

Cos., Inc., 210 F.3d 1099, 1102 (9th Cir. 2000). When the moving party meets its initial burden,

the burden then shifts to the party opposing judgment to “go beyond the pleadings and by [its]

own affidavits, or by the depositions, answers to interrogatories, and admissions on file,

designate specific facts showing that there is a genuine issue for trial.” Celotex Corp. v. Catrett,

477 U.S. 317, 324 (1986).

2. INDEPENDENT TRUSTEES’ MOTION FOR SUMMARY JUDGMENT.

As trustees of the fund, the independent trustees were designated specific powers in order

to manage the fund pursuant to a trust agreement (Berman Decl. Exh. 16). These powers

allowed the independent trustees to hire CSIM (ibid.) and CS&Co. (Berman Decl. Exh. 5). 

Despite hiring CSIM and CS&Co., the independent trustees retained the ultimate decisionmaking authority over the fund (Berman Decl. Exhs. 16, 5).

The independent trustees maintained direct oversight of the fund’s management through

various committees. The committees included Investment Oversight, Marketing, Distribution

and Shareholder Servicing, Audit and Compliance, and Governance Committee. The

committees were responsible for proposing recommendations to the independent trustees, who

would then discuss and vote on the recommendations at board meetings (Berman Decl. Exh. 19). 

The independent trustees exercised their decision-making authority on issues that contributed

to the fund’s decline. For example, the independent trustees discussed and approved the

recommendation to eliminate the 25 percent cap on non-agency collateralized mortgage

obligations (Berman Decl. Exhs. 22, 23). The independent trustees knew that this change would

require the Statements of Additional Information to be revised (Berman Decl. Exh. 24) and that

it would alter the composition of the fund’s portfolio (Berman Decl. Exh. 25).

The independent trustees also participated in the marketing efforts of the fund by serving

on the Marketing, Distribution, and Shareholder Serving Committee (Berman Decl. Exh. 6). 

As committee members, the independent trustees reviewed samples of the fund’s marketing and

provided input into the advertising (Berman Decl. Exh. 8). For example, at a board meeting in

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August 2006, the independent trustees reviewed and approved a response to a letter sent by the

SEC, which criticized the fund’s advertisements because they did not contain balanced

disclosures (Berman Decl. Exh. 14). 

The record further reveals that the independent trustees reviewed samples of the fund’s

marketing. On February 7, 2008, Jennifer Hafner, President of CSIM’s Product Development

Group, wrote, “For your review I have attached the YieldPlus marketing and distribution

presentation. This topic will be discussed during the Marketing and Distribution sub-committee

meeting” (Berman Decl. Exh. 9). This email may have been a response to defendant Smith’s

request during a board meeting on January 22, 2008 “that at the next quarterly Board Meeting

the Trustees be provided with an update of the [YieldPlus] Fund’s strategic positioning from a

portfolio management standpoint and a marketing and distribution standpoint” (Berman Decl.

Exh. 10). Employees of CSIM also testified that the independent trustees reviewed story boards

of advertisements from different funds and that the independent trustees provided input into the

advertising (Berman Decl. Exhs. 11, 12). The independent trustees, however, dispute that they

participated in the marketing efforts of the fund. The independent trustees declare that they

“did not draft or approve any YieldPlus fund advertisements” and that they “did not direct the

solicitation efforts of any person or entity involved in selling YieldPlus fund shares”

(Taylor Decl. Exh. 1).

A. Second Claim: Violation of the Securities Act of 1933.

The independent trustees assert that plaintiffs’ second claim fails as against them because

plaintiffs cannot show that the independent trustees were “sellers” under Section 12 of the Act. 

Section 12(a)(2) governs civil liabilities arising in connection with prospectuses and other

communications to shareholders. The statute states, in relevant part:

(a) In general

Any person who— 

* * *

(2) offers or sells a security . . . by means of a prospectus or

oral communication, which includes an untrue statement of

a material fact or omits to state a material fact necessary in

order to make the statements, in the light of the

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circumstances under which they were made, not misleading

(the purchaser not knowing of such untruth or omission),

and who shall not sustain the burden of proof that he did

not know, and in the exercise of reasonable care could not

have known, of such untruth or omission, 

shall be liable . . . to the person purchasing such security from

him . . . 

15 U.S.C. 77l(a)(2). Such a claim may be asserted against the “seller” of a security. Ibid.

The Supreme Court in Pinter v. Dahl, 486 U.S. 622, 647 (1988), interpreted “seller” to mean the

“owner who passed title” or any “person who successfully solicits the purchase motivated at

least in part by a desire to serve his own financial interest or those of the security owner.” As the

Ninth Circuit explained, “plaintiff must allege [and, eventually, prove] that the defendant did

more than simply urge another to purchase a security; rather, the plaintiff must show that the

defendant solicited the purchase of the securities for their own financial gain.” In re Daou

Systems, Inc., 411 F.3d 1006, 1029 (9th Cir. 2005). (The Ninth Circuit has also clarified that

Pinter’s analysis of claims under Section 12(a)(1) governs claims under Section 12(a)(2) as well. 

Moore v. Kayport Package Express, Inc., 885 F.2d 531, 535–36 (9th Cir. 1989).) The Ninth

Circuit has not addressed whether the aggregate effect of signing registration statements,

participating in marketing efforts, and retaining ultimate authority over and knowledge about

a fund constitutes solicitation of a fund’s shares under Section 12(a)(2) of the Act. The Ninth

Circuit has also not addressed whether any of the above acts, standing alone, amount to

solicitation under Section 12(a)(2).

The independent trustees assert that they should be granted summary judgment because

plaintiffs cannot pass the first of two tests under Pinter. More specifically, the independent

trustees assert that plaintiffs cannot establish that they passed title to fund shares. Plaintiffs

agree that the independent trustees did not pass title to class members, as the undisputed

evidence shows that the corporate entity Schwab Investments owned the fund and passed title to

class members (Berman Decl. Exh. 5). The question, therefore, rests on whether the independent

trustees solicited the purchase of the securities for their own financial gain.

The independent trustees assert that they should be granted summary judgment because

plaintiffs cannot prove this. More specifically, the independent trustees assert that the evidence

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is undisputed that they did not solicit the purchase of the fund’s shares. Their argument,

however, is premised on a selective reading of the evidence in the record. Counsel for the

independent trustees asserts that (Br. 3–4) (internal citations omitted):

Plaintiffs dutifully alleged, in their complaint, that the independent

trustees “were ‘participants’ in the distribution of the fund’s

shares,” “‘offered and sold’” shares, and “‘actively solicited the

sale of the fund’s shares.’” No evidence supports these

allegations. None of the independent trustees played any role in

soliciting investors in the YieldPlus fund. They did not draft or

approve the fund’s advertisements. They did not participate in any

solicitation efforts of the YieldPlus fund’s underwriter, Charles

Schwab & Co., Inc. And, with one isolated exception, none of the

trustees spoke with, or otherwise communicated with, any

individual investors about the YieldPlus fund.

Counsel’s assertions are true to the extent that they are aligned with the sworn declarations of

each of the independent trustees. All of the independent trustees, except for one, prepared sworn

declarations that stated, in relevant part, as follows (Taylor Decl. Exh. 1):

I have never personally solicited any investor to purchase

YieldPlus fund shares. To the best of my recollection, I have

never spoken, or otherwise communicated with, any investor about

the possibility of purchasing YieldPlus fund shares. I did not draft

or approve any YieldPlus fund advertisements. I did not direct the

solicitation efforts of any person or entity involved in selling

YieldPlus fund shares.

Defendant Holmes prepared a similar, but slightly different sworn declaration that stated, in

relevant part, as follows (Taylor Decl. Exh. 1) (emphasis added):

I have never personally solicited any investor to purchase YieldPlus

fund shares. To the best of my recollection, I have only spoken with

a single investor about the YieldPlus fund. To the best of my

recollection, other than this isolated incident, I have never spoken,

or otherwise communicated with, an investor about the possibility

of purchasing YieldPlus fund shares. I did not draft or approve any

YieldPlus fund advertisements. I did not direct the solicitation

efforts of any person or entity involved in selling YieldPlus fund

shares.

The assertions of counsel and the sworn declarations of the independent trustees conflict

with other evidence in the record. The record shows that the independent trustees maintained

direct oversight of the fund’s management through various committees. The committees were

responsible for proposing recommendations to the independent trustees, who would then discuss

and vote on the recommendations at board meetings (Berman Decl. Exh. 19). 

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The record shows that the independent trustees participated in the marketing efforts of

the fund by serving on the Marketing, Distribution, and Shareholder Serving Committee

(Berman Decl. Exh. 6). As committee members, they reviewed samples of the fund’s marketing

and provided input (Berman Decl. Exh. 8). Plaintiffs point to the board meeting in August 2006,

at which the independent trustees reviewed a letter sent by the SEC that criticized the fund’s

advertisements because they did not contain balanced disclosures (Berman Decl. Exh. 14). 

The letter directed that “[t]he Funds and CSCO should review the YieldPlus Fund’s sales

materials to ensure that they are accurate and contain sufficient, balanced disclosure to avoid

being false or misleading” (Berman Decl. Exh. 13). The independent trustees reviewed the letter

and approved a response to it during the board meeting (Berman Decl. Exh. 14).

Plaintiffs point to other evidence in the record that reveals that the independent trustees

reviewed samples of the fund’s marketing. For example, plaintiffs reference the letter written by

Jennifer Hafner regarding the independent trustees’ review of the YieldPlus marketing and

distribution presentation (Berman Decl. Exh. 9). Furthermore, plaintiffs note that employees of

CSIM testified that the independent trustees reviewed story boards of advertisements from

different funds and that the independent trustees provided input into the advertising (Berman

Decl. Exhs. 11, 12).

These issues alone are sufficient to preclude summary judgment. The record does not

unequivocally support the independent trustees’ position that they did not solicit the purchase

of the fund’s shares. As described at length above, the independent trustees’ sworn declarations

conflict with the other evidence presented by plaintiffs. Plaintiffs have demonstrated that the

record is not so one-sided. After weighing the evidence, a jury could find that the cumulation of

the independent trustees’ actions amounted to a solicitation. 

This order recognizes that there is a separate issue as to whether the independent trustees

acted “for their own personal gain” as required under Pinter. The independent trustees’ motion

for summary judgment, however, relied on the seller requirement of Section 12 as being

dispositive and did not address the financial gain requirement. This order, therefore, does not

address the financial gain requirement.

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For the reasons explained above, the independent trustees’ motion for summary judgment

as to plaintiffs’ second claim is DENIED.

B. Fourth Claim: Violation of the California 

Business and Professions Code.

The independent trustees’ argue that plaintiffs’ fourth claim, violation of the California

Business and Professions Code Section 17200, fails as against them because plaintiffs do not

have a basis for seeking restitution from the independent trustees. Plaintiffs do not oppose the

independent trustees’ motion as to the fourth claim. “An order for restitution is one ‘compelling

a UCL defendant to return money obtained through an unfair business practice to those persons

in interest from whom the property was taken, that is, to persons who had an ownership interest

in the property or those claiming through that person.’” Korea Supply Co. v. Lockheed Martin

Corp., 29 Cal. 4th 1134, 1149 (2003). The compensation paid to the independent trustees was

paid by their employer and not the fund’s investors. Furthermore, the undisputed evidence

shows that the independent trustees did not receive any money from any investor. Accordingly,

the independent trustees’ motion for summary judgment as to plaintiffs’ fourth claim is

GRANTED.

3. DEFENDANT DAIFOTAS’ MOTION FOR SUMMARY JUDGMENT.

The only claim remaining in this matter against defendant Daifotis is brought under

Section 12(a)(2). Like the independent trustees, defendant Daifotis argues that he was not a

statutory “seller” under Section 12(a)(2) because he did not directly solicit investors’ purchases

of YieldPlus shares. 

Defendant Daifotis was an employee of CSIM, the entity hired by Schwab Investments

(which was the title owner of the YieldPlus shares sold to investors) as the investment advisor

and administrator of the YieldPlus Fund (Daifotis Dep. at 13). His responsibilities included

oversight of the Fixed Income Portfolio Management group, which included the Taxable Bond

Portfolio Management Team that oversaw the fund’s investments (id. at 14). He was also a

representative of Schwab Investments.

Plaintiffs call defendant Daifotis the face and the voice of the fund. His image appeared

in advertisements promoting the fund, including fact sheets constituting omitting prospectuses

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(Berman Decl. Exh. 1). His promotional activities on behalf of the fund included

communicating with Schwab’s Financial Consultants and Registered Investment Advisors to

answer their questions about the fund, speaking directly with certain clients about the fund,

conducting webcasts, going on branch visits, and participating in industry conferences (Berman

Decl. Exhs. 15–18). Plaintiffs cite to more than 40 appearances by defendant Daifotis before

investors and financial media where he promoted Schwab and its funds, including the YieldPlus

Fund (Berman Decl. Exhs. 19–34). Plaintiffs point to his 2006 employment review which noted

in part that he was “a tireless marketer of the funds” (Berman Decl. Exh. 35). They also point to

his 2005 and 2007 self assessments, where he wrote of his promotional efforts of the fund

(Berman Decl. Exhs. 14, 36). They cite to the deposition of Keith Maddock, a senior product

manager for CSIM who testified that defendant Daifotis reviewed new fund marketing pieces

(Berman Decl. Exh. 37). Finally, they note that he signed a letter sent directly to fund investors

entitled “a message from the Schwab YieldPlus Bond Fund Manager, Kim Daifotis” (Berman

Decl. Exh. 39). In that letter, he discussed the factors that investors should consider in deciding

whether to hold the fund.

Defendant Daifotis argues that these promotional efforts and his role as a subject-matter

expert and spokesperson for Schwab’s fixed income funds (including the YieldPlus Fund) does

not make him a statutory seller. His deposition reflects his position. In response to the question,

“Is it your testimony that you did not at all at the time you were chief investment officer make

any efforts to get others to invest in the fund?,” defendant Daifotis replied, “That is correct”

(Daifotis Dep. at 27). However, his actions establish at the least a question of fact which should

be left to the jury regarding whether or not he is a seller.

Similar to the independent trustees’ motion for summary judgment, defendant Daifotis’

motion only addressed the seller requirement of Section 12. This order, therefore, does not

address the financial gain requirement of Section 12.

For the reasons explained above, defendant Daifotis’ motion for summary judgment is

DENIED.

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CONCLUSION

For the foregoing reasons, the independent trustees’ motion for summary judgment is

DENIED IN PART and GRANTED IN PART. Defendant Daifotis’ motion for summary judgment is

DENIED.

IT IS SO ORDERED.

Dated: April 8, 2010. WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

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