RIA sues Schwab unit for straying from objectives

FWR Staff

12 March 2009

Firm says Charles Schwab Investment Management dropped ball with bond fund. NorthCaldwell, N.J.-based RIA Northstar Financial Advisors Inc. has filed an amended class action suit against Charles Schwab Investment Management (CSIM), charging that the Schwab Total Bond Market Fund substantially deviated from its stated investment objectives.

U.S. courts are usually reluctant to hear suits over investment objectives, but the federal judge in this case seems to be willing to let matters run their course -- over Schwab's strenuous objections.

Northstar initially filed its suit against Schwab in August last year, claiming that the funds' advisor strayed from its stated investment objective between 31 August 2007 and 23 August 2008. In August 2007 Schwab's Total Bond Market Fund had $1.5 billion in assets. Out of 150 million shares then outstanding, Northstar held 239,290.193 of them for its clients.

Significant litigation

Judge Susan Illston of the U.S. Court for the Northern District of California upheld Northstar's right to amend the complaint, saying that fund shareholders can sue a fund advisor for actions inconsistent with the fund's objective.

"The judge obviously gave it a hard look and she thinks it's significant litigation," Robert Finkel of New York-based Wolf Popper, one of several law firms representing Northstar in its action against Schwab, told Law360. "We're happy on all scores."

The no-load Schwab Total Bond Market Fund is managed by Steven Chan. It "seeks high current income by investing in investment-grade government, corporate, mortgage, commercial mortgage and asset-backed bonds with maturities longer than one year," according to Morningstar, a Chicago-based fund-rating firm. After top quartile returns of 2.65% and 4.59% in 2005 and 2006 respectively, the fund came in with second-from-bottom quartile returns of 4.78% and -4.42% in 2007 and 2008 respectively. This year to date it's in the bottom quartile with a 2.35% loss.

CSIM is the asset-management unit of San Francisco-based Charles Schwab. It had $239 billion in assets under management as of about a year ago, according to its most recent ADV filing with the SEC.

Northstar, the RIA affiliate of New York-based CPA Richard Berse, provides financial-planning and investment advice with a value bias to mainly high-net-worth clients. It had $31.4 million in assets under management in January 2009, according to its ADV filing. -FWR

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