Schwab [see profile] already settled lawsuits surrounding its beleaguered YieldPlus fund, and last week it outright defeated a similar suit involving its Total Bond Market Fund. But the fight isn't over yet. A new suit may be just over the horizon.

On August 12, the United States Court of Appeals for the Ninth Circuit ordered a federal district court to dismiss Northstar Financial Advisors v. Schwab Investments, which was filed by Greenbaum, Rowe, Smith & Davis. Northstar claimed that Schwab violated part of the '40 Act by deviating from Total Bond's strategy (as laid out in the prospectus) and ultimately losing money in mortgage-backed securities. Basically, the court ruled that private investors don't have the right to sue over such a deviation.

"Neither the language of section 13(a) [of the '40 Act], the structure of the ICA [i.e. Investment Company Act of 1940], nor the statute's legislative history ... reflect any congressional intent to create, or recognize a previously established, private right of action to enforce section 13(a)," Judge Mary Schroeder wrote in her opinion. "The job of enforcement remains exclusively with the SEC."

Yet the very next day another law firm, Hagens Berman Sobol Shapiro, unveiled its own similar investigation into Schwab's Total Bond fund. Hagens may file its own suit.

SmartMoney's Elizabeth Trotta covered Schwab's recent victory, after interviews with Fund Democracy president Mercer Bullard and Ameriprise advisor Rich Atkison.

This isn't Schwab's only recent courtroom fight over alleged strategy deviation inside of a Schwab fund. In May the San Francisco-based brokerage giant reached a final settlement with shareholders in the YieldPlus fund, agreeing to pay out $35 million over claims under California law and $200 million under federal law (see The MFWire, 5/6/2010).

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Company Press Release

SAN FRANCISCO--Hagens Berman Sobol Shapiro LLP is investigating potential new claims against Schwab Investments and Charles Schwab Management Inc. for causing the Schwab Total Bond Market Fund (the Fund) (NASDAQ:SWLBX) to deviate from its fundamental investment objective to track the Lehman Brothers U.S. Aggregate Bond Index beginning August 31, 2007.

According to Hagens Berman's investigation, the Fund deviated from its stated investment objective by investing a material percentage of its portfolio in high risk non-U.S. agency collateralized mortgage obligations (CMOs). The Fund also deviated from its stated fundamental investment objective by investing more than 25 percent of its total assets in U.S. agency and non-agency mortgage-backed securities and CMOs. The Fund's deviation from its stated investment objective caused investors to suffer a negative 12.64 percent differential in total return for the Fund compared to the Index for the period August 31, 2007 through February 27, 2009, consisting of a negative total return of 4.80 percent for the Fund compared to a positive total return of 7.85 percent for the Index over that same period (including interest payments).

On August 12, 2010, in a separate action filed by other counsel and a financial advisor, the Ninth Circuit dismissed all federal claims based upon Section 13a of the Investment Company Act of 1940. While that action will continue on certain claims, Hagen Berman's investigation is looking at other claims that can be asserted by those who held shares in the fund since August 31, 2007 that are not affected by that opinion or asserted in that action. A copy of that opinion in Northstar Financial Advisors v. Schwab Investments can be found here.

If you owned shares of the Fund at any time from August 31, 2007 to the present (the Class Period) and suffered damages as a result therefore, you may be eligible to be a lead or representative plaintiff in an action seeking recovery for losses incurred by you and other holders of SWLBX shares. To discuss this matter, contact the managing partner of Hagens Berman’s Berkeley office, Reed R. Kathrein, at swlbx@hbsslaw.com or call Mr. Kathrein at 510-725-3000.

About Hagens Berman

Seattle-based Hagens Berman Sobol Shapiro LLP is a investor-rights class-action law firm with offices in San Francisco, Chicago, Boston, Los Angeles, Phoenix and Washington, D.C. Founded in 1993, HBSS continues to successfully fight for consumer rights in large, complex litigation. More about the law firm and its successes can be found at www.hbsslaw.com. 

Edited by: Neil Anderson, Managing Editor


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