According to a press release dated September 16, 2008, the complaint the Schwab Total Bond Market Fund’s registration statement and subsequent supplemental prospectuses, Schwab Investments emphasized the conservative nature of the Fund’s indexed securities by stating the SWLBX Fund was designed to offer high current income by tracking the performance of the Lehman Brothers U.S. Aggregate Bond Index and was intended for investors seeking to fill the fixed income component of their asset allocation plan. According to a press release from a law firm the complaint alleges that Schwab Total Bond Market Fund deviated from its stated investment objective by investing in high risk non-U.S. agency collateralized mortgage obligations (CMOs). The non-U.S. agency CMOs were not part of the Lehman Brothers U.S. Aggregate Bond Index and were substantially more risky than the U.S. agency securities and other instruments that comprised the index, so the lawsuit. The plaintiff alleges that the Fund also 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, while its investment objectives prohibited any concentration of investments greater than 25% in any industry, other than if necessary to track the Lehman Brothers U.S. Aggregate Bond Index. According to the complaint the Defendants’ deviation from the SWLBX ’s investment objective exposed the Schwab Total Bond Market 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. As a result from the deviation of its stated investment objective caused a negative total return of 1.09% for the period September 4, 2007 through August 27, 2008, compared to a positive return of 5.92% for the Lehman Brothers U.S. Aggregate Bond Index over that period.
Prior to case consolidation, defendants moved for dismissal on November 20, 2008. That motion was granted in part on February 20, 2009. A First Amended Complaint was filed on March 2, 2009. Plaintiffs voluntarily dismissed defendants Charles Scwhab & Co., Inc. and Schwab Total Bond Market Fund on March 6, 2009. On March 26, 2009, the defendants filed a motion to dismiss the First Amended Complaint.
According to the Order dated April 16, 2009, Judge Illston granted the plaintiff and defendants’ stipulated request for an order dismissing without prejudice, and tolling, Northstar’s claim against defendants for violations of the California Business and Professions Code.
On April 27, 2009, Judge Susan Illston signed the Order granting the defendants' motion to certify for interlocutory appeal and to stay, and denying without prejudice defendants' motion to dismiss. The case went to the Ninth Circuit Court of Appeals.
According to a press release dated August 20, 2010, on August 12, 2010, the Ninth Circuit granted defendants' appeal seeking to dismiss plaintiff's claim under the Investment Company Act of 1940. Other state law claims remain in the action and are being aggressively prosecuted by co-lead counsel. On August 11, 2011, the Court dismissed the case with prejudice. According to the Final Judgment, judgment is entered against the plaintiff and in favor of the defendants.
On September 7, 2011, a Notice of Appeal was filed.