A recent Ninth Circuit ruling concerning investments in a series of Schwab mutual funds has further diminished the rights of investors, who have suffered a spate of unfriendly decisions in recent weeks.
On Aug. 12, 2010, the Ninth Circuit Court of Appeals reversed a lower court ruling, finding that there is no private right of action for investors under Section 13(a) of the Investment Company Act. The case was brought on behalf of those who owned shares in the Schwab Total Bond Market Fund.
Following its review of the specific statutory language of the Investment Company Act, and the language of Section 13(a) in particular, the court held that the U.S. Supreme Court “has come to require increasingly specific Congressional direction for the allowance of private suits to enforce public laws, and no such direction is present in this statute.”
The plaintiffs, represented by Berman DeValerio as co-lead counsel, had argued that the defendant company deviated from its stated investment objective by investing in risky collateralized mortgage obligations, or CMOs. The plaintiffs, Northstar Financial Advisors, Inc., had invested in the fixed-income Schwab Total Bond Market Fund believing it would track the more stable Lehman Brothers U.S. Aggregate Bond Index.
Plaintiffs, who contended that the CMOs were substantially riskier than the Lehman index, also alleged that the fund deviated from its stated fundamental investment objective by investing more than 25% of its total assets in U.S. agency and non-agency mortgage-backed securities and CMOs. The fund’s investment objectives prohibited any concentration of investments greater than 25% in any one industry.
Such deviation, the plaintiffs alleged, exposed the fund and its shareholders to tens of millions of dollars in losses stemming from a sustained decline in the value of non-agency mortgage-backed securities.
In February 2009, the District Court denied a defense motion to dismiss claims based on Section 13(a) of the Investment Company Act, concluding that the Act did provide investors with a private right of action. Some 18 months later, however, the Ninth Circuit issued a three-member panel opinion reversing the district court and holding that Section 13(a) does not recognize a private cause of action.
The decision is the latest in a number of cases with decidedly negative results for investors. Most notable among them: the U.S. Supreme Court’s June 24, 2010, decision in Morrison, et al v. National Australia Bank, Ltd., which severely limited investors’ ability to hold multinational companies accountable for their fraudulent actions. In the weeks since the high court’s ruling, several lower courts have found against U.S. investors who were suing multinational companies because their shares were purchased on foreign exchanges.
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.