Judge Dismisses Two Class Action Suits Against Schwab as Improperly Based on State Law

On March 2, 2011, Judge Lucy Koh of the U.S. District Court for the Northern District of California dismissed all claims made by lead plaintiff Northstar Financial Advisors against Schwab Investments, its Trustees and its Investment Advisor. Northstar brought a class action lawsuit alleging that the defendants deviated from their investment strategy by investing in non-U.S. agency collateralized mortgage obligations and by concentrating greater than 25% of its investments in U.S. agency and non-agency MBS. Judge Koh found that Northstar’s claims should have been brought under federal, rather than state, law. Federal law applies under the Securities Litigation Uniform Standards Act (“SLUSA”) because Northstar represents a putative class of over 50 people and alleges misrepresentations made in connection with the purchase or sale of shares of Schwab’s fund. Judge Koh specifically noted that the complaint need not allege scienter, reliance, or loss causation in order for SLUSA preclusion to apply, and even where the state law claims do not require a misrepresentation, if the allegations themselves assert misrepresentations as the basis for those claims, federal law should apply.

Judge Koh also made a similar ruling on March 8, 2011 in a factually related case, brought by a class against Schwab Investments for the same investments and alleged misstatements. Northstar Decision. Smit Decision.