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The Charles Schwab Corporation under investigation for violations of the securities laws

The Charles Schwab Corporation under investigation for violations of the securities laws

Apparently, the Charles Schwab Corporation (NYSE: SCHW) violated securities law and the Schall Law Firm, a national shareholder rights litigation firm, announced on August 25, that it is investigating these claims on behalf of investors. 

Furthermore, the investigation will be focused on whether Schwab issued false and misleading statements or failed to disclose information that was relevant to investors. Equally important, in June the Securities and Exchange Commission (SEC) charged three Schwab investment adviser subsidiaries for not disclosing the manner in which they were allocating client’s funds. 

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’, while in reality, Schwab’s own data showed that under most conditions cash in the portfolios caused them to make less money while being exposed to the same risk.   

Shady practices

In the robo-adviser portfolios, Schwab made money by moving the cash to an affiliate bank, loaning it out, and keeping for itself the difference it earned between the interest on the loans it received and what it paid to the robo-adviser clients. 

Without arguing the case Schwab’s investment adviser subsidiaries, Charles Schwab & Co., Inc., Charles Schwab Investment Advisory, Inc., and Schwab Wealth Investment Advisory, Inc., agreed to a cease-and-desist order. This resulted in the firm paying out $52 million in disgorgement and prejudgment interest, and a $135 million civil penalty.

Moreover, Schwab agreed to keep an independent consultant that will advise and review their policies and procedures relating to their robo-adviser’s disclosures, to ensure that policies and procedures are properly followed. 

Finally, the Schall Law Firm specializes in securities class action lawsuits and shareholders’ rights, and as this case has not yet been certified it is unclear how many investors will decide to sue Schwab for misrepresenting their AI advisor services. 

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