Charles Schwab Ducks 8-Year-Old Investors’ Suit


     SAN FRANCISCO (CN) – A federal judge ended an eight-year long battle over whether Charles Schwab should be held liable for delineating from an approved investment plan that cost investors millions, finding federal law trumped all 14 claims.
     Northstar Financial Advisors, Inc. filed a putative class action against Schwab in 2008, alleging the company broke away from financial objectives tied to the Schwab Total Bond Market Fund by investing too heavily in risky mortgage-backed securities that accounted for more than 25 percent of the fund’s assets.
     The original plan involved tracking the Lehman Brothers U.S. Aggregate Bond Index, and the deviation from that objective allegedly cost shareholders tens of millions of dollars when the housing bubble burst – an affect triggered in part by relaxed industry standards that led to bad loans made to homeowners who couldn’t afford them.
     The fund suffered a total negative return of 4.80 percent as a result, according to Northstar, which notes the Lehman Index enjoyed a positive 7.85 percent return for the same class period between September 2007 and February 2009.
     Northstar filed five amended complaints.
     U.S. District Judge Lucy Koh ultimately found that Northstar’s 14 causes of action were preempted by the Securities Litigation Uniform Standard Act (SLUSA).
     Northstar filed a motion for reconsideration on Oct. 15, 2015, citing some changes in language within its complaint that it said changed the preemption assertion.
     Schwab subsequently filed a motion for judgment on the pleadings.
     Koh said that omitting some key words and phrases was not enough to dodge preemption.
     “The gravamen of Northstar’s allegations, from the original complaint to the fifth amended complaint, have remained the same: that defendants misrepresented or omitted a material fact in their management of the fund,” she wrote in a 29-page order. “As this court properly determined such allegations are subject to SLUSA preclusion.”
     She added: “The advisor and trustees may be held liable for aiding and abetting only if Northstar can bring a viable breach of fiduciary duty claim. Here, because Northstar’s breach of fiduciary duty claims are precluded by SLUSA, Northstar’s aiding and abetting breach of fiduciary duty claims must also fail.”
     Koh also denied Northstar’s motion for leave to amend.
     “Over five successive complaints, Northstar’s fiduciary duty claims have hinged upon and continue to hinge upon the same misrepresentation or omission of material fact,” she wrote. “‘When a district court has already granted a plaintiff leave to amend, its discretion in deciding subsequent motions to amend is particularly broad.’ Here, in light of the circumstances recited above, the court finds that providing Northstar additional leave to amend would be futile. Northstar’s motion for class certification is denied as moot. The clerk shall close the file.”

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