Another lawsuit filed over Schwab bond fund

Plaintiffs charge Total Bond Market offering deviated from stated investment strategy

Sep 12, 2010 @ 12:01 am

By Dan Jamieson

The Charles Schwab Corp. has been hit with another lawsuit claiming that its Total Bond Market Fund, which was represented as tracking the Lehman Brothers U.S. Aggregate Bond Index, loaded up with mortgage-backed securities prior to the financial crisis.

The proposed class action was filed Sept. 3 in U.S. District Court for the Northern District of California.

The petition asks for court permission to represent in-vestors who bought the fund after May 31, 2007.

“By that time, the fund had significantly deviated” from its stated investment objective, said Sean Matt, a partner at Hagens Berman Sobol Shapiro LLP, which filed the claim on behalf of Jerry Smit, a Colorado investor.

In 2007, the Schwab fund held over 67% in residential-mortgage-backed securities, the lawsuit claims, while the Lehman index, since renamed the Barclay's U.S. Aggregate Bond Index, had a 37% weighting.

A similar suit, Northstar Financial Advisors Inc. v. Schwab Investments, is also pending in federal court in California.

The Northstar litigation doesn't include class action claims under California's Unfair Competition Law, a broad consumer protection statute, Mr. Matt said.

“We expect the two cases to be consolidated, and we plan to defend ourselves vigorously,” Greg Gable, a spokesman for Schwab, wrote in an e-mail.

The bond fund performed well prior to the financial crisis and then “suffered a decline ... because of extraordinary events in the credit markets that were unique and unforeseeable,” he wrote.

“I don't think they would have got so caught up [in the financial crisis] if they'd been consistent with how they represented” the fund, Mr. Matt said. Schwab went “far afield” from the Lehman index, he said.

Separately, in April, Schwab agreed to a $200 million settlement in a class action over the Schwab YieldPlus Fund, which was also accused of making risky bets in mortgage-backed bonds and re-lated products. Hagens Berman was one of the plaintiff firms in that case as well.

In May, the company agreed to pay another $35 million to California investors who weren't part of the earlier settlement.

E-mail Dan Jamieson at


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