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Ninth Circuit Affirms in Part District Court Dismissal of Class Claims in Northstar Financial v. Schwab Investments Case

In February 2016, the U.S. District Court for the Northern District of California granted a motion dismissing with prejudice the claims brought by Northstar Financial Advisors, Inc., on behalf of its clients who invested in the Schwab Total Bond Market Fund, against Schwab Investments, Charles Schwab Investment Management, Inc. and the trustees of the Schwab Trust. Northstar alleged that, between August 2007 and February 2009, Schwab had managed the Fund’s investments in a manner that deviated from the Fund’s stated investment objectives and policies, resulting in investor losses. Northstar claimed under Massachusetts law that the Fund’s trustees breached a purported fiduciary duty owed directly to the Fund’s shareholders, that the Fund breached a purported contract with its shareholders embodied in the Fund’s proxy statement and prospectus and that the Fund’s shareholders had claims against Schwab as third-party beneficiaries under the Fund’s investment advisory agreement. Although the U.S. Court of Appeals for the Ninth Circuit had previously decided that these were legitimate claims under state law, the District Court, on remand from the Ninth Circuit, dismissed Northstar’s claims with prejudice, determining that they were essentially claims of misrepresentation in the sale of securities and were therefore precluded from being brought as a class action by the federal Securities Litigation Uniform Standard Act (SLUSA). Following this decision, Northstar appealed the decision of the District Court to the Ninth Circuit.

On September 14, 2018, the Ninth Circuit issued an opinion affirming the District Court’s dismissal of Northstar’s class claims, agreeing that the claims were precluded by SLUSA. However, the Ninth Circuit concluded that the District Court had erred in dismissing the claims with prejudice and remanded the case to the District Court to give Northstar an opportunity to amend its complaint.

The Ninth Circuit’s opinion was issued under the caption Northstar Financial Advisors, Inc. v. Schwab Investments, et. al., Case No. 16-15303.

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Vedder Price P.C. attorneys provide a full range of services to a diverse financial services clientele. Attorneys practicing in the firm’s Investment Services Group are experienced in all aspects of investment company and investment adviser securities regulations, broker-dealer regulatory and compliance matters, derivatives and financial product matters, and ERISA and tax matters. Clients include mutual fund complexes, hedge and other private funds, money managers, broker-dealers, independent directors, and many other types of institutions such as banks, savings and loans,...

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