Cases / Current Cases

Schwab Total Bond Market Fund (SWLBX) Contract Litigation


Documents




Wolf Popper LLP Files Appellate Brief in Ninth Circuit Against Schwab Investments on Behalf of Investors in the Schwab Total Bond Market Fund

On June 6, 2016, Wolf Popper LLP filed its brief on behalf of plaintiff Northstar Financial Advisors, Inc. before the United States Court of Appeals for the Ninth Circuit.  In the brief, Northstar argues that the putative class action against Schwab Investments and other affiliated defendants does not implicate the Securities Litigation Uniform Standards Act (“SLUSA”), which preempts state law class claims “alleging an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security.”

Northstar alleges that by investing more than 25 percent of assets in risky non-agency mortgage-backed securities and collateralized mortgage obligations, Schwab portfolio managers ignored the Schwab Total Bond Market Fund’s fundamental investment objectives of tracking the Lehman Brothers U.S. Aggregate Bond Index and avoiding big industry bets.  This caused the fund to lag its benchmark from September 1, 2007 to February 27, 2009, losing 4.80 percent while the index posted a positive total return of 7.85 percent.

In a widely-discussed decision dated April 28, 2015, the Ninth Circuit held that Schwab could not deviate from its fundament investment objectives without shareholder approval, and as a result, investors in the fund could sue for breach of contract and breach of fiduciary duty.  Northstar Fin. Advisors, Inc. v. Schwab Invs., 779 F.3d 1036 (9th Cir. 2015). The U.S. Supreme Court thereafter denied the defendants’ petition for a writ of certiorari.  136 S. Ct. 240 (2015).  Wolf Popper contends that these state law claims—which the Ninth Circuit upheld— do not hinge on fraudulent conduct, and thus SLUSA plays no role. “A class action is not converted into a fraud case … simply because the defendant fails to disclose the contract was breached,” the brief states.

For further information about this case, please contact any of the following Wolf Popper attorneys: 

Robert C. Finkel
rfinkel@wolfpopper.com

Joshua W. Ruthizer
jruthizer@wolfpopper.com

Adam J. Blander
ablander@wolfpopper.com

Wolf Popper LLP Prevails On Ninth Circuit Appeal Sustaining Claims for Breach of Contract and Breach of Fiduciary Duty against Schwab Investments and Other Affiliated Schwab Defendants on Behalf of Investors in the Schwab Total Bond Fund. 

The Ninth Circuit Court of Appeals, on March 9, 2015, reversed a lower court’s dismissal, reinstating plaintiff Northstar Financial Advisor Inc.’s breach of contract, breach of fiduciary duty and other claims over alleged losses stemming from the Schwab Total Market Fund.  The Ninth Circuit held that the Schwab fund prospectus is a contract in ruling that a financial adviser has standing to sue on behalf of investors.

The plaintiff in the action accuses Schwab Investments and affiliated companies of stuffing risky mortgage-backed securities into a bond index mutual fund, causing the fund to significantly lag its benchmark. 

The plaintiffs said that by investing more than 25 percent of assets in non-agency mortgage securities and collateralized mortgage obligations, Schwab portfolio managers ignored the fund's fundamental investment objectives of tracking the Lehman Brothers U.S. Aggregate Bond Index and avoiding big industry bets.

This caused the fund to lag its benchmark from Sept. 1, 2007 to Feb. 27, 2009, losing 4.80 percent while the index posted a positive total return of 7.85 percent.

Because Schwab adopted two fundamental investment policies after shareholders voted to approve them, it effectively formed a contract between the shareholders, the fund and the trust, U.S. District Judge Edward Korman, sitting by designation, said in the opinion.

Robert C. Finkel, counsel for Northstar, was quoted in Law360 as being gratified with the court’s decision.  “The decision reaffirms the principle that when a fund establishes a fundamental investment policy changeable only by shareholder vote, it is obligated to adhere to that principle or can be sued for breach of contract,” Finkel said. “We are looking forward to continuing to litigate the claim in district court.”


The Ninth Circuit has remanded the lawsuit to District Court, where it continues to be litigated.

______________________________________________________________
 

Schwab Total Bond Market Fund (SWLBX)

Wolf Popper LLP is co-lead counsel in a class action lawsuit against Schwab Investments on behalf of investors in the Schwab Total Bond Market Fund (SWLBX).  The action is pending in the United States District Court for the Northern District of California (Civil Action No. C 08 4119).

The action alleges that Schwab caused the Bond Fund to deviate from its stated investment objective to track the Lehman Bros. bond index by investing in high risk non-U.S. agency collateralized mortgage obligations (“CMOs”). The non-U.S. agency CMOs were not part of the Lehman Index and were substantially more risky than the U.S. agency securities and other instruments that comprised the Index. The Fund also deviated from its stated fundamental investment objective by investing more than 25% of its total assets in U.S. agency and non-agency mortgage-backed securities.  The Fund’s deviation from its stated investment objective caused it to substantially deviate from the Lehman Index and caused substantial injury to its shareholders.

The district court, in an August 2011 order, dismissed plaintiff’s Third Amended Class Action complaint. The district court's dismissal is currently on appeal to the Ninth Circuit.  The Firm attorneys principally responsible for this case are Robert Kornreich and Robert Finkel.


Related Practice Area