A panel of U.S. Judges says that Charles Schwab & Co. (SCHW) must face a lawsuit brought by Northstar Financial Advisors Inc. The investment advisory firm claims that Schwab invested the assets of a bond-index fund in high-risk mortgage debt prior to the financial crisis. The plaintiff is proposing that this case be a class action securities claim, which could include investors who have owned the fund since 2007. In particular, notes Northstar Financial Advisors Inc., the Schwab Total Bond Market Fund (SWLBX) placed lots of risky debt into the fund, resulting in losses of tens of millions of dollars, as well as underperformance against its benchmark.
Reuters reports that the plaintiffs claim that because Schwab invested over 25% of assets in non-agency mortgage securities and collateralized mortgage obligations, the firm’s portfolio managers disregarded the fundamental investment objectives of the fund to track the Lehman Brothers U.S. Aggregate Bond Index and stay away from industry bets. Because of this, they argued, the fund lagged its benchmark from 9/1/07 to 2/27/09, suffering a 4.80% loss while the index posted a 7.85% positive total return.
Northstar Financial Advisors Inc. filed its securities case in 2008 but the complaint was mired in procedural matters until now. This latest appeal was argued in 2013 in front of three federal judges of the 9th U.S. Circuit Court of Appeals in San Francisco. Their decision, finally—albeit nearly two years later—reinstates the breach of fiduciary duty, breach of contract, and other claims.