Schwab Total Bond Market Fund Class Action Lawsuit Filed

A class action lawsuit has been filed on behalf of investors in the Charles Schwab Total Bond Market Fund (SWLBX), which allegedly suffered substantial losses after managers deviated from the stated investment strategy by relying heavily on high-risk residential mortgage-backed securities.  

The Schwab Total Bond Market Fund class action lawsuit was filed on September 3 in the U.S. District Court for the Northern District of California on behalf of investor Jerry Smit, from Colorado. It seeks class action status to represent all investors who bought the fund after May 31, 2007.

According to allegations in the investor lawsuit, 67% of the Total Bond Market Fund was invested in residential mortgage-backed securities in 2007 when the housing market crashed. The fund had been represented as tracking the Lehman Brothers U.S. Aggregate Bond Index, now known as Barclay’s U.S. Aggregate Bond index. However, that index only consisted of 37% for residential mortgage-backed securities in 2007.

Charles Schwab officials have indicated that they will fight the lawsuit, as well as an individual lawsuit filed by Northstar Financial Advisors Inc. in California over the same issue. In a report by Investment News, officials at Schwab say that the conditions of the market crash were extraordinary, unique and unforeseeable.

In addition to the class action suit, Schwab is likely to face a number of investor arbitration claims over Total Bond Market Fund losses. Instead of participating in a class action, individuals can file an arbitration claim against the broker through the Financial Industry Regulatory Authority (FINRA), which is a non-governmental regulatory body that oversees more than 5,000 brokerage firms throughout the United States. Financial fraud lawyers often advise that investors are in a better position to recover their losses quicker through a broker arbitration claim, as opposed to the lengthy class action process.

Schwab faced similar lawsuits over its YieldPlus Fund, and in May the company reached a $200 million settlement in a class action lawsuit over the bond fund. Investors again charged the company with violating its prospectus by relying too heavily on subprime mortgage securities.