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Class action suit filed against Charles Schwab for high-risk MBS

Sep 07, 2010

Hagens Berman Sobol Shapiro LLP has announced that it has filed a class-action lawsuit against Charles Schwab & Company on behalf of investors who owned shares in the Schwab Total Bond Market Fund as of Nov. 30, 2006. The suit, filed in the U.S. District Court for the Northern District of California, accuses San Francisco-based Charles Schwab of causing the fund to deviate from its fundamental business objective to track the Lehman Brothers U.S. Aggregate Bond Index. “We intend to prove that Charles Schwab caused investors to suffer losses when it began investing in volatile, high-risk mortgage-backed securities without informing shareholders or seeking shareholder approval through a vote, which the company was obligated to do, according to the fund’s prospectus,” said Hagens Berman Managing Partner and plaintiffs’ attorney Steve Berman. The plaintiffs contend that the fund deviated from its stated investment objective by investing a material percentage of its portfolio in high-risk, non-agency collateralized mortgage obligations, or CMOs, which were not part of the Lehman Bros. U.S. Aggregate Bond Index, according to the complaint. Plaintiffs attorneys also contend that the fund deviated from its stated fundamental investment objective by investing more than 25 percent of its total assets in non-agency mortgage-backed securities and CMOs, the suit alleges. Schwab’s deviation from the fund’s primary investment objective led to tens of millions of dollars in shareholder losses due to a long-term decline in the value of non-agency mortgage-backed securities, the lawsuit contends. Plaintiffs’ attorneys believe that the fund’s deviation from its stated investment objective caused investors to experience a negative 12.64 percent differential in total return for the fund compared to the Lehman Bros. U.S. Aggregate Bond Index from Aug. 31, 2007 to Feb. 27, 2009, the lawsuit contends. During that period, the suit states, the fund’s shareholders suffered a negative total return of 4.8 percent, compared to a positive total return of 7.85 percent for the Lehman Bros. U.S. Aggregate Bond Index. The suit accuses Charles Schwab of violations of the California Business & Professions Code. Plaintiffs have asked the court to award restitution to all class members, to order Charles Schwab to return any management or other fees collected after the fund’s alleged deviation from its fundamental business objectives and to order Charles Schwab to cover the class’ legal costs. A separate action was previously filed against Schwab by other counsel, but the Ninth Circuit Court of Appeals recently remanded that case back to district court, ruling the plaintiff could not pursue its claim under the Investment Company Act of 1940. However, Hagens Berman has had previous success against Charles Schwab by suing under California’s strict consumer protection laws. In April, Charles Schwab agreed to a $235 million settlement with plaintiffs represented by Hagens Berman in a civil class-action lawsuit related to the Schwab YieldPlus Fund. Investors accused the managers of the fund of investing in overly risky mortgage-related structured debt. “We filed this action under California state law, which clearly protects investor rights,” Berman said. “We believe this will better represent the interests of our clients and other Schwab investors.” For more information, visit
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