Charles Schwab has entered into an agreement with plaintiffs to settle all claims in a civil class action lawsuit related to the Schwab YieldPlus Fund, including a California state law claim not included in an earlier settlement with plaintiffs announced on April 20, 2010.

The combined settlement, in which Charles Schwab, without admitting liability, would pay $35m to settle California state law claims in addition to the previously disclosed $200m for plaintiffs’ federal claims, allows it to avoid the distraction and uncertainty of a trial, and the further possibility of a protracted appeals process.

As disclosed previously, Charles Schwab is the subject of consolidated class action litigation filed between March and May 2008, and regulatory investigations relating to the investment policy, disclosures, and marketing of the Schwab YieldPlus Fund, an ultra-short bond fund (Bond Fund).

The Bond Fund was designed to invest in a variety of fixed income instruments, including corporate bonds, asset backed securities, mortgage-backed securities, and other fixed income investments. The credit crisis that began in mid-2007 led to a decline in the value of a majority of fixed income investments market wide. As a result, certain Schwab clients who chose to invest in the Bond Fund experienced a decline in their investments, leading to the litigation.

Based on the this settlement agreement, Charles Schwab has increased the contingency reserve previously established in connection with the litigation by $14m pre-tax, which is net of expected insurance coverage. Together with previously reported reserves of $182m pre-tax in connection with the federal and state claims, the combined reserve reduces first quarter 2010 net income by approximately $120m, or $0.10 per share. Applicable accounting rules require the company to include the impact of the settlement in its first quarter results.

However, the combined settlement agreement remains subject to preliminary and final court approval. Related regulatory matters also remain open.