On February 23, 2016, the U.S. District Court for the Northern District of California issued an order denying the plaintiffs’ motion for reconsideration and granting the defendant’s motion for judgment on the pleadings in the shareholder class action originally brought in August 2008 by Northstar Financial Advisors, Inc. (Northstar), on behalf of its clients, against Schwab Investments (the Trust), a Massachusetts business trust, the Board of Trustees of the Trust (the Board) and Charles Schwab Investment Management, Inc. (CSIM). In doing so, the District Court has now ruled against the plaintiffs on all claims in this case, having determined that all such claims are precluded by the Securities Litigation Uniform Standards Act of 1998 (SLUSA). Northstar, on behalf of its clients, had filed a shareholder class action lawsuit against the Trust, the Board and CSIM, setting forth a number of claims based on allegations that the Schwab Total Bond Market Fund (the Fund), a series of the Trust for which CSIM serves as investment adviser, deviated from its fundamental investment policies. The case was on remand to the District Court after the U.S. Court of Appeals for the Ninth Circuit reversed the District Court’s dismissal of several claims and ruled, among other things, that Northstar (1) could bring state law claims for breach of fiduciary duty against the Board directly, rather than derivatively, (2) could assert a claim against the Fund itself for breach of a purported contract between Fund shareholders and the Trust based on “the mailing of the proxy statement and the adoption of the two fundamental investment policies after shareholders voted to approve them, and the annual representations by the Fund that it would follow these policies” and the shareholders’ acceptance of the terms set forth in the proxy statement and prospectuses by means of their investment in the Fund, and (3) could bring a claim against CSIM under the theory that shareholders should be considered third-party beneficiaries of the Fund’s investment advisory contract with CSIM.
SLUSA generally bars class action lawsuits if the action is based on state law claims and alleges either a material misrepresentation or omission or the use of manipulation or deception in connection with the purchase or sale of a “covered security,” which includes shares of mutual funds. The District Court found that “the gravamen of Northstar’s allegations” is that the defendants misrepresented or omitted a material fact in their management of the Fund: “If, as Northstar alleges, Defendants did deviate from the Fund’s investment objectives, then Defendants committed a misrepresentation or omission of material fact. Specifically, Defendants promised to manage the Fund one way, but ended up managing the Fund in a different way.” Thus, the District Court determined that Northstar’s allegations are subject to SLUSA preclusion.
The case is Northstar Financial Advisors, Inc. v. Schwab Investments, et al., case number 5:08-cv-04119 in the U.S. District Court for the Northern District of California. Northstar filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit on February 25, 2016.