The U.S. Supreme Court on Monday left intact an appeals court decision that allowed a financial adviser to sue Charles Schwab Corp over allegations that the brokerage firm deviated from objectives set for a mutual fund, costing investors millions of dollars in losses.
The court rejected Schwab’s appeal of a March ruling by the 9th U.S. Circuit Court of Appeals that revived the lawsuit.
The appeals court said Northstar Financial Advisors Inc could sue on behalf of its clients and that Charles Schwab should face claims of breach of contract over the alleged losses in the Schwab Total Bond Index fund. Other claims in the original lawsuit are still pending.
The plaintiffs said that by investing more than 25 percent of assets in non-agency mortgage securities and collateralized mortgage obligations, Schwab portfolio managers ignored the fund’s fundamental investment objectives of tracking the Lehman Brothers U.S. Aggregate Bond Index and avoiding big industry bets.
They said this caused the fund to lag its benchmark from Sept. 1, 2007, to Feb. 27, 2009, losing 4.80 percent while the index posted a positive total return of 7.85 percent.
Writing for the appeals court, Judge Edward Korman, who normally hears cases in Brooklyn, New York, said Schwab’s adoption of the fund’s fundamental policies were “sufficient to form a contract” between the shareholders and the fund itself.
A district court judge had dismissed Northstar’s lawsuit in August 2011.
The case is Schwab Investments v. Northstar Financial Advisors Inc, U.S. Supreme Court, No. 15-134. (Reporting by Lawrence Hurley; Editing by Will Dunham)