Northstar Fin. Advisors Inc. v. Investments, Case No. 08-CV-04119-LHK
| Decision Date | 05 October 2015 |
| Docket Number | Case No. 08-CV-04119-LHK |
| Court | U.S. District Court — Northern District of California |
| Parties | NORTHSTAR FINANCIAL ADVISORS INC., et al., Plaintiffs, v. SCHWAB INVESTMENTS, et al., Defendants. |
Plaintiff Northstar Financial Advisors, Inc. ("Northstar") brings this action against Schwab Investments, the members of the Board of Trustees of Schwab Investments, and Charles Schwab Management, Inc. (collectively, the "Defendants"). Before the Court is Defendants' motion to dismiss Plaintiff's Fourth Amended Complaint ("FAC"). See ECF No. 214 ("FAC"); ECF No. 217 ("Mot."). Having considered the parties' submissions, the relevant law, and the record in this case, the Court hereby GRANTS in part and DENIES in part Defendants' motion to dismiss.
On August 28, 2008, Northstar filed its first complaint ("Original Complaint") in thisputative class action on behalf of all persons who owned shares of the Schwab Total Bond Market Fund (the "Fund") at any time from August 31, 2007 to the present. ECF No. 1 ("Compl.") ¶ 1. Northstar is a registered investment advisory and financial planning firm that serves both institutional and individual clients. Id. ¶ 9. Northstar manages both discretionary and nondiscretionary accounts on behalf of investors in Northstar's role as an investment advisor. Id. Northstar traded through Charles Schwab's Institutional Advisor Platform, where it purchased shares in the Fund for its clients. Id. ¶¶ 11-12.
Although Northstar has amended its Complaint four times, Northstar's core allegations remain the same. Northstar alleges that Defendants deviated from the Fund's investment objective to track the Lehman Brothers U.S. Aggregate Bond Index (the "Index") in two ways. First, Northstar alleges that, beginning around August 31, 2007, the Fund deviated by investing in high risk non-U.S. agency collateralized mortgage obligations ("CMOs") that were not part of the Lehman Index and that were substantially more risky than the U.S. agency securities and other instruments that comprised the Index. See id. ¶ 3; FAC ¶ 5. Second, Northstar alleges that, beginning around August 31, 2007, the Fund deviated from the Fund's investment objectives (which prohibited any concentration of Fund assets greater than 25% in any one industry, unless such concentration was necessary in order to track the Index) by investing more than 25% of the Fund's total assets in U.S. agency and non-agency mortgage-backed securities and CMOs. Compl. ¶ 4; FAC ¶ 6. Northstar alleges that Defendants' deviation from the Fund's investment objectives exposed the Fund and the Fund's shareholders to tens of millions of dollars in losses due to a sustained decline in the value of non-agency mortgage-backed securities. According to Northstar, the Funds' deviation caused the Fund to incur a negative total return of 4.80% for the period of September 1, 2007, through February 27, 2009, compared to a positive return of 7.85% for the Index over this same period. FAC ¶ 7.
Based on the allegations described above, Northstar asserted the following four claims against a number of Schwab-related entities1 in the Original Complaint: (1) violation of § 13(a) of the Investment Company Act of 1940 ("ICA"); (2) breach of fiduciary duty; (3) breach of contract; and (4) breach of the covenant of good faith and fair dealing. Compl. ¶¶ 85-99. Northstar's § 13(a) claim was asserted under federal law; Northstar's remaining claims were asserted under state law. On November 20, 2008, Defendants moved to dismiss the Original Complaint. See ECF No. 33 ("First MTD"). U.S. District Judge Susan Illston, to whom this case was previously assigned, granted in part and denied in part Defendants' motion. See ECF No. 74 ("Northstar I").
First, Judge Illston found that Northstar did not have standing to bring any of the claims asserted in the Original Complaint because Northstar "only purchased shares for its clients and not for itself." Northstar I at 3. Judge Illston, however, granted Northstar leave to amend because Northstar could plausibly cure this deficiency by receiving an assignment of claims from one of Northstar's clients. Id. at 4. Second, Judge Illston found that there was an implied private right of action under § 13(a) of the ICA and that Northstar had stated a claim for violation of shareholders' voting rights under this section. Northstar I at 7, 9-12. Finally, turning to Northstar's state law causes of action, Judge Illston dismissed Northstar's breach of fiduciary duty claim with leave to amend. Judge Illston instructed Northstar "to carefully examine whether each of the defendants named in this claim can in fact be named in such a claim, and under which state's laws such a claim [may be] properly brought." Id. at 14-15. Because of the close relationship between Northstar's breach of fiduciary duty claim and Northstar's breach of contract claim, Judge Illston also granted Northstar leave to amend the breach of contract claim.Id. at 15. Judge Illston denied Defendants' motion to dismiss Northstar's breach of the covenant of good faith and fair dealing claim. Id. at 15-16.
On March 2, 2009, Northstar filed its First Amended Complaint. On March 5, 2009, Defendants filed a motion which sought leave to file an interlocutory appeal of Judge Illston's order. Defendants sought only to challenge Judge Illston's finding that Northstar could assert a private right of action under § 13(a) of the ICA. This motion was granted, ECF No. 108, and this action was stayed pending the outcome of Defendants' appeal. This case was stayed from April 27, 2009, through August 13, 2010. In the interim, this case was reassigned, first to U.S. District Judge Richard Seeborg, and then to the undersigned. See ECF Nos. 115 & 117. On August 13, 2010, the Ninth Circuit reversed Judge Illston's order, and held that there is no private right of action under § 13(a). Northstar Fin. Advisors, Inc. v. Schwab Invs. ("Northstar II"), 615 F.3d 1106, 1122 (9th Cir. 2010).
In light of Northstar II, Northstar filed, on September 28, 2010, a Second Amended Complaint ("SAC") which did not include a § 13(a) claim. Northstar also asserted an assignment of claims from Henry Holz, a client of Northstar's who had owned shares of the Fund as of August 31, 2007, in an attempt to address the standing issue previously identified by Judge Illston. See ECF No. 127 ("SAC") ¶ 15.
The SAC named Schwab Investments (the "Trust"), the members of the Board of Trustees of Schwab Investments (the "Trustees"),2 and Charles Schwab Investment Management, Inc. (the "Advisor") as Defendants.3 According to the SAC, the Trust is an investment trust organized under Massachusetts law, and "consists of a series of mutual funds, including the Fund." SAC ¶16. The Trust is managed by the Trustees. Id. ¶¶ 19-20. Pursuant to a contractual agreement between the Trust and the Advisor, known as the Investment Advisory Agreement ("IAA"), the Advisor handles day-to-day oversight of the Fund. Id. ¶¶ 23, 154. The SAC alleged claims based on (1) breach of fiduciary duty (against all Defendants); (2) breach of contract (against the Trust); (3) breach of the covenant of good faith and fair dealing (against the Trust and the Advisor); and (4) breach of contract as a third party beneficiary to the IAA (against the Advisor).
This Court dismissed the SAC on March 2, 2011. See ECF No. 175 ("Northstar III"). The Court found all of Northstar's claims precluded by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") because all of the claims alleged misrepresentations or omissions of material fact made in connection with the purchase or sale of the Fund's shares. 15 U.S.C. § 77p. The Court stated that "the central theme . . . of Plaintiffs' claims is that defendants made misrepresentations about how investments in the fund would be managed, that Plaintiffs purchased Fund shares relying on these misrepresentations, and that Plaintiffs were injured when these statements turned out to be false." Northstar III at 9.
In addition to dismissing Northstar's claims based on SLUSA preclusion, the Court found that Northstar had failed to sufficiently allege a breach of contract claim despite specific instructions from Judge Illston in Northstar I to "add more specific allegations regarding the language plaintiff relies on to allege the formation of a contract, as well as each defendants' involvement." Northstar I at 15. In light of this fact, Northstar's breach of contract claim and Northstar's related claim for breach of the covenant of good faith and fair dealing were dismissed with prejudice. Northstar III at 18-19.
Northstar's claim for third party beneficiary status was also dismissed, with leave to amend to "specify . . . what specific provisions of the Investment Advisor Agreement were allegedly breached, and how." Id. at 24.
Finally, with respect to Northstar's breach of fiduciary duty claim, the Court noted that it was possible for this claim to fall outside the scope of SLUSA preclusion through a statutoryexception known as the Delaware carve-out. Accordingly, Northstar was given leave to amend Northstar's breach of fiduciary duty claim in order to clarify whether this claim could indeed fall under the Delaware carve-out. Id. at 15.
Northstar filed a Third Amended Complaint (ECF No. 181 ("TAC")) on March 28, 2011. For the first time, Northstar bifurcated potential Plaintiffs into two subclasses. TAC ¶ 65. First, Northstar asserted claims on behalf of a "Pre-Breach" class, which consisted of "all persons or entities who purchased shares of the Fund on or prior to August 31, 2007, and who continued to hold their shares as of August 31, 2007." Id. Second, Northstar asserted claims on behalf of a ...
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