In the latest chapter in Northstar Financial Advisers v. Schwab Investments, a district court last week ruled that the plaintiff’s claims are precluded by federal law. The complaint, originally filed in 2008, alleged that the fund’s adviser failed to adhere to the fund’s fundamental investment policies, investing outside the fund’s stated investment objective and investing more than 25 percent of fund assets in a single industry. Last year, the Ninth Circuit ruled that fund boards could be sued directly by shareholders for breach of contract based on statements in a fund’s registration statements. The Forum filed an amicus brief in the subsequent appeal to the Supreme Court, but the Court declined to review the case.
The Ninth Circuit remanded the case to the district court to determine whether the claims were precluded by the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). The federal statute “bars private plaintiffs from bringing a covered class action based on state law claims alleging that a defendant made a misrepresentation or omission (or employed any manipulative or deceptive device) in connection with the purchase or sale of a covered security,” according to John Baker’s FundLaw blog. The court had ruled in October that the breach of contract claims were essentially misrepresentation claims precluded by SLUSA. The court’s ruling last week denied the plaintiff’s request for reconsideration of the October finding and further found that the plaintiff’s fiduciary claims were also misrepresentation claims precluded by SLUSA. According to Baker, the district court’s ruling means that the Ninth Circuit’s decision “will have little impact,” though the district court’s ruling is subject to review by the Ninth Circuit should the plaintiffs choose to appeal.