Smit v. Charles Scwhab & Co. Inc

• Decision Date: 08 March 2011
• Docket Number: Case No.: 10-CV-03971-LHK
• Court: U.S. District Court — Northern District of California
• Parties: JERRY SMIT, individually and on behalf of all others similarly situated, Plaintiff, v. CHARLES SCWHAB & CO., INC., SCHWAB INVESTMENTS and CHARLES SCHWAB INVESTMENT MANAGEMENT, INC., Defendants.

JERRY SMIT, individually and on behalf of allothers similarly situated, Plaintiff,

v. CHARLES SCWHAB & CO., INC., SCHWABINVESTMENTS and CHARLES SCHWABINVESTMENT MANAGEMENT, INC., Defendants.

Case No.: 10-CV-03971-LHK

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

Dated: March 8, 2011

ORDER GRANTING-IN-PART AND DENYING-IN-PART DEFENDANTS' MOTION TO DISMISS

Defendants have moved to dismiss Plaintiff's First Amended Complaint (FAC) pursuant to Federal Rule of Civil Procedure 12(b)(6). This Motion was heard on March 3, 2011. Having considered the parties' briefing and arguments on this Motion, the Court grants-in-part and denies-in-part defendants' Motion.

I. Introduction

This action is related to another action pending before this Court, Northstar Financial Advisors Inc. v. Schwab Investments, No. 08-cv-04119 LHK ("Northstar"). In Northstar, the plaintiff asserted a putative class action on behalf of investors in the Schwab Total Bond Market Fund (the Fund). Initially, the Northstar complaint alleged a claim for violation of Section 13(a) of the Investment Company Act of 1940 (ICA). This claim was sustained by Judge Illston (to whomthis case was previously assigned), but on interlocutory appeal the Ninth Circuit held that there is no implied private right of action under this Section. See Northstar Fin. Advisors, Inc. v. Schwab Invs., 615 F.3d 1106, 1122 (9th Cir. 2010). Before the Ninth Circuit's decision, Northstar asserted an individual claim under California's Unfair Competition Law (UCL) based on the underlying alleged violation of the ICA. Cal. Bus. and Prof. Code §§ 17200 et seq.; see Northstar Dkt. No. 75 (Northstar FAC). Northstar's claim was later withdrawn and the parties agreed that if Northstar reasserted it, it would be subject to binding arbitration pursuant to an agreement between Northstar and the Northstar defendants. See Northstar Dkt. No. 102, April 16, 2009. Northstar filed a Second Amended Complaint (Northstar SAC) on September 28, 2010.

On September 3, 2010, Plaintiff Smit filed a complaint asserting a UCL claim based on the alleged violation of Section 13(a) of the ICA (essentially the individual UCL claim that was asserted and then withdrawn in Northstar) on behalf of a putative class of Schwab Total Bond Market Fund investors. See Dkt. No. 1 (Compl.). The factual allegations in the initial and amended Smit complaints were largely duplicative of those in the Northstar FAC.

Briefly, Plaintiff alleged 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, Plaintiff alleged that the Fund deviated from this objective by investing in high risk non-U.S. agency collateralized mortgage obligations (CMOs) that were not part of the Lehman Index and were substantially more risky than the U.S. agency securities and other instruments that comprised the Index. Compl. ¶ 3, FAC ¶ 3. Second, Plaintiff alleged that the Fund deviated from its investment objectives which prohibited any concentration of investments greater than 25% in any industry by investing more than 25% of its total assets in U.S. agency and non-agency mortgage-backed securities and CMOs. Id. ¶¶ 4. Plaintiff alleged that defendants made these changes without first holding a shareholder vote, as required by Section 13 of the ICA. Id. ¶ 2. Plaintiff alleged that defendants' deviation from the Fund's investment objective exposed the Fund and its shareholders to tens of millions of dollars in losses due to a sustained decline in the value of non-agency mortgage-backed securities. The Funds' deviation from its stated investment objective caused it toincur a negative total return of 4.80% for the period August 31, 2007 through February 27, 2009, compared to a positive return of 7.85% for the Index over that period. Id. ¶¶ 5.

On November 10, 2010, defendants moved to dismiss the first Smit complaint. In lieu of opposing that motion, Plaintiff Smit filed the FAC on December 2, 2010. The FAC names Charles Schwab & Co., Inc., Schwab Investments (the Trust), and Charles Schwab Investment Management, Inc. (the Investment Advisor) as defendants. Defendants withdrew their original motion to dismiss and filed the Motion considered here on January 5, 2011. The Court heard oral argument on March 3, 2011.

II. Legal Standard

Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. To survive a motion to dismiss, the plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). This "facial plausibility" standard requires the plaintiff to allege facts that add up to "more than a sheer possibility that a defendant has acted unlawfully." Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). In deciding whether the plaintiff has stated a claim, the Court must assume the plaintiff's allegations are true and draw all reasonable inferences in the plaintiff's favor. Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). However, the court is not required to accept as true "allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." In re Gilead Scis. Sec. Litig, 536 F.3d 1049, 1055 (9th Cir. 2008). Leave to amend must be granted unless it is clear that the complaint's deficiencies cannot be cured by amendment. Lucas v. Dep't. of Corr., 66 F.3d 245, 248 (9th Cir. 1995).

III. Application

a. ICA 13(a) and 48(a) as Predicates for UCL Claim

Defendants argue that because there is no implied private right of action under the ICA § 13(a) or § 48(a), these statutes cannot serve as the violation underlying a UCL claim. Although Defendants' argument has appeal, the Court finds that this outcome would be inconsistent withcase law holding that even statutes with no private right of action can serve as the basis for a UCL claim. See Stop Youth Addiction, Inc. v. Lucky Stores, Inc., 17 Cal. 4th 553, 572 (1998). In Stop Youth Addiction, the California Supreme Court held that a private party could state a UCL claim based on an alleged violation of a penal code provision, even though there was no private right to enforce the penal code directly. Id. The court found that "even though a specific statutory enforcement scheme exists, a parallel action for unfair competition is proper pursuant to applicable provisions of the [UCL]." Id. (internal citations omitted). The court relied on language from the UCL itself: "[u]nless otherwise expressly provided, the remedies or penalties provided by this chapter [i.e., ch. 5, Enforcement, Bus. & Prof. Code, § 17200-17209] are cumulative to each other and to the remedies or penalties available under all other laws of this state." Stop Youth Addiction, 17 Cal. 4th at 573.

Despite the statute's focus on state laws, courts (including this Court) have read the "express bar" requirement to apply to federal laws as well. See, e.g., Ferrington v. McAfee, Inc., No. 10-CV-01455-LHK, 2010 U.S. Dist. LEXIS 106600 at *44 (N.D. Cal. Oct. 5, 2010) (finding that plaintiff could assert a Lanham Act claim as the predicate for a UCL claim, even though the plaintiff had no standing under the Lanham act; the standing requirement did not impose an "express, absolute bar" which would prohibit enforcement via the UCL); Hartless v. Clorox Co., No. 06CV2705 JAH(CAB), 2007 U.S. Dist. LEXIS 81686 at *12-*13 (S.D. Cal. Nov. 2, 2007) (dismissing a UCL claim brought under the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) because the legislative history revealed that Congress had considered and "express[ly]" rejected a private right of action under the Act).

In Northstar,, the Ninth Circuit found that there is no implied right of action under the ICA § 13(a).¹ Northstar, 615 F.3d at 1118. This decision was based not on an express rejection of such a right, but instead on the lack of an explicit intent to create such a right. Id. "[N]othing in the language or context of... [the 1970 and 2007 ICA] amendments demonstrates a clearcongressional intent to allow private lawsuits to enforce the statute's provisions." Id. Although defendants correctly point out that the Ninth Circuit found that enforcement of the ICA was "exclusively" granted to the SEC, this finding was not based on any express language in the ICA itself or in its legislative history. Without an express bar prohibiting private enforcement of the ICA § 13(a), the Court concludes that a UCL claim can proceed on the basis of an alleged violation of this statute.

Additional authorities cited by defendants and not already addressed are not helpful to the analysis here. In Levy v. JP Morgan Chase, No. 10CV1493 DMS, 2010 U.S. Dist. LEXIS 118232 at *11 (S.D. Cal. Nov. 5, 2010), the Court held that "to the extent [the] Plaintiff allege[d] a violation of [the UCL based on the Federal Trade Commission Act], " the Plaintiff had failed to "allege factual content sufficient to state a claim" for violation of the UCL based on violation of the Federal Trade Commission Act.) Thus, the dismissal appears to be based on a failure to meet Rule 8's pleading requirements rather than on a finding that a FTCA claim could never serve as the basis for a UCL claim. Likewise, in Ballard v. Chase Bank USA, No. 10cv790 L(POR), 2010 U.S. Dist LEXIS 130097 at *7-9 (S.D. Cal. Dec. 9, 2010), the court decided that California Civil Code § 2923.6 could not form the "borrowed" claim underlying a UCL claim because it implied no private right of action. However, it stated this holding in a short paragraph of the order without citation to any contrary authority, including Stop Youth Addiction²

Therefore, defendants' motion to dismiss the FAC because it asserts the ICA §§ 13(a) and 48(a) as the basis for a UCL claim is DENIED.

b. SLUSA Preclusion

Defendants argue that Plaintiff's claims are...