A Northern California District Court judge dismissed a class-action lawsuit alleging that Charles Schwab’s Intelligent Portfolios violated its fiduciary duty by over-investing clients in cash.
The complaint, originally filed in September by plaintiffs Lauren Marie Barbiero, Kimberly Jo Lopez and William Kenneth Lopez, said “unwarranted and unfair cash sweeps” by the automated investing program cost investors as much as $500 million in market gains. The plaintiffs also alleged that Schwab misrepresented the robo-adviser as a free service while collecting management fees from clients investing in proprietary funds and earning interest on cash swept into Schwab’s bank.
In November, Schwab moved to have the case thrown out.
District Judge Phyllis Hamilton sided with Schwab. Because the class action’s claims are based on state law and allege that the defendants made misrepresentations in connection with the sale or purchase of a covered security, the Securities Litigation Uniform Standards Act prevents the federal court from hearing them, the judge decided.
The statute was designed to prevent artful pleading or forum shopping by those injured in a securities transaction and looking to evade limits on securities litigations designed to block frivolous or abusive suits, Hamilton noted. The court had to determine if the claims could have been pursued under the Securities and Exchange Commission’s rules.
“Reading the complaint in a light most favorable to plaintiffs, the court finds that SLUSA bars plaintiffs’ complaint in its entirety,” Hamilton wrote in her decision.
Calling the lawsuit a “meritless complaint,” Peter Greenley, Charles Schwab's director of corporate external relations, said the company is pleased with the court’s dismissal. Intelligent Portfolios is “a key component of our advisory lineup and an important way to help clients invest for the future in a diversified way," Greenley said in a statement.
The plaintiffs were represented by attorneys from Scott + Scott Attorneys at Law and Peiffer Wolf Carr Kane & Conway. Neither firm immediately responded to requests for comment.
Schwab’s robo-adviser is still facing regulatory scrutiny. The brokerage announced in July that the SEC was probing Intelligent Portfolios regarding disclosure issues. While it didn't detail the SEC’s investigation, the company revealed that it had set aside $200 million to settle potential charges.
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