TD Ameritrade Charged with Securities Violations

TD Ameritrade is accused of misleading investors in its Reserve Yield Plus Fund.

Coughlin Stoia Geller Rudman & Robbins LLP announced that a class action has been commenced in the United States District Court for the Southern District of New York charging the Reserve Short-Term Investment Trust, its parent and affiliates, certain of its officers and trustees, and TD Ameritrade Holding Corp with securities violations.

The suit is being brought on behalf of those who purchased or held the shares of certain mutual funds offered by the Reserve Short-Term Investment Trust, including the Reserve Yield Plus Fund during the period from July 27, 2007, to September 16, 2008, according to the announcement. The complaint alleges that many of the Fund’s purchasers were sold their interests in the Fund by TD Ameritrade and its employees who consistently represented to investors that the Fund was just like a money market fund.

According to the complaint, it was due to these positive, but false, statements, investors purchased and/or continued to hold shares in the Fund.

The law firm says that on July 27, 2007, the Reserve Short-Term Trust filed a prospectus with the Securities and Exchange Commission (SEC) that said the Fund’s focus was to “seek as high a level of current income as is consistent with the preservation of capital and liquidity” and a “stable $1.00 share price.”

The lawsuit says the facts omitted from the prospectus and other statements made by defendants during the class period included:

  • the fund was no longer adhering to the stated objectives of preserving capital, but in an effort to achieve greater yields was pursuing riskier instruments;
  • despite the fact that many observers believed Lehman Brothers would be the next Wall Street failure after Bear Stearns collapsed in March 2008, the Fund purchased a large amount of Lehman commercial paper in April;
  • the fund was not designed to protect the $1.00 net asset value (NAV), as were traditional money market funds, and was significantly riskier than money market funds;
  • the fund’s internal controls were inadequate to prevent defendants from taking on excessive risk;
  • the fund failed to disclose the extent of its relationship with TD Ameritrade.

On September 16, The Reserve Fund made an announcement concerning the Primary Fund, one of its money market funds, stating that the value of the debt securities issued by Lehman Brothers Holdings, Inc. (face value $785 million) and held by the Primary Fund had been valued at zero and, as a result, the NAV of the Primary Fund was $0.97 per share (see Reserve Primary Fund Promises $20B in Shareholder Repayments). Coughlin Stoia said on September 16, the NAV of the Reserve Yield Plus Fund also collapsed from $1.00 per share to $0.97 due to its investment in debt securities issued by Lehman. Thereafter, the Reserve Short-Term Trust suspended providing a daily NAV on the Reserve Yield Plus Fund.

More information and a copy of the complaint is available here.