Schwab must face adviser’s lawsuit after all: appellate court

Charles Schwab & Co. Inc. must face a lawsuit brought by a financial advisory firm accusing the firm of investing a bond-index fund’s assets in risky mortgage debt before the financial crisis, a panel of U.S. judges said Monday.
Northstar Financial Advisors Inc. said the Schwab Total Bond Market Fund (SWLBX) loaded its fund with risky mortgage debt, causing tens of millions of dollars in losses and underperformance against its benchmark.
As the financial crisis reached its apex, securities backed by mortgages saw their value sliced as some homeowners lost the ability to meet their loan obligations. Northstar has proposed the lawsuit as a “class-action” claim, which means it could include investors who owned the fund after 2007.
The decision was a long time coming for the North Caldwell, N.J.-based advisory firm. They originally filed their lawsuit on Aug. 28, 2008, but it’s been tied up in procedural back-and-forth. The latest appeal was argued in a San Francisco courthouse on May 17, 2013 before three federal judges, including one who ultimately argued that the case should not move forward.
“We’re happy,” said Robert C. Finkel, a lawyer at Wolf Popper, which represented the financial-planning firm. “We always thought it was a very easy case because they said they would operate the fund as an index fund, and they deviated from their index.”
In a statement, San Francisco-based Schwab said it disagreed with the ruling and would continue to defend itself.
“The court has simply put the case back to where it was in 2008,” said Sarah Bulgatz, a Schwab spokeswoman, in the statement. “We intend to show that the decline in the fund’s [net asset value] was caused by the unprecedented financial crisis, and fund shareholders who held the fund through the financial crisis suffered few or no losses. The plaintiffs have not yet presented any evidence or proven their claims.”
News of the ruling was reported first by Reuters.

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