Barbiero v. Charles Schwab Investment Advisory, Inc.

Background

Lauren Marie Barbiero, Kimberly Jo Lopez, William Kenneth Lopez, and Tammy L. Coleman brought a proposed class action against Charles Schwab Corporation and its wholly owned subsidiary, Charles Schwab Investment Advisory, Inc. The plaintiffs challenged Schwab Intelligent Portfolios, an investment service launched in 2015 that used an online questionnaire to create portfolios, usually containing exchange-traded funds and similar investments.

The plaintiffs alleged that defendants advertised the service as free but earned money by moving the cash portion of client accounts into Schwab Bank and keeping the resulting net interest margin. They further alleged that defendants placed too much of their accounts in cash, contrary to their investment objectives, financial circumstances, and risk tolerance. According to the complaint, this caused the plaintiffs and proposed class members to miss market gains.

The first amended complaint asserted six claims under California law: breach of fiduciary duty, violation of California’s Unfair Competition Law, negligent misrepresentation, breach of contract, unjust enrichment and constructive trust, and breach of the covenant of good faith and fair dealing.

Defendants’ Motions

Defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(1), arguing that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) barred the action. They also moved under Rule 12(b)(6), arguing that plaintiffs failed to state a claim. Defendants separately sought judicial notice and requested that materials containing plaintiffs’ personal financial information be sealed.

Court’s Analysis

The court explained that SLUSA prevents federal courts from hearing certain covered class actions based on state law that allege a misrepresentation, omission, or manipulative or deceptive device connected with the purchase or sale of a covered security.

The court found that the case met each part of that test. First, it was a covered class action because plaintiffs sought damages for themselves and a proposed class of Intelligent Portfolios account holders. Second, all six claims arose under California statutory or common law. Third, the alleged misrepresentation was that the program would invest according to each client’s objectives, circumstances, and risk tolerance, while defendants allegedly over-allocated assets to cash for their own financial benefit. The court determined that this alleged misrepresentation was the basis of all six claims.

Fourth, the court found that the alleged misrepresentation was connected with the purchase or sale of securities because plaintiffs claimed they would have purchased other securities instead of leaving funds in cash and sought damages for lost market gains. The court noted that plaintiffs did not allege they would have merely closed their accounts. Finally, the court found that the stocks and exchange-traded funds plaintiffs intended to purchase were covered securities.

Ruling

The court granted defendants’ motion to dismiss under Rule 12(b)(1) because SLUSA barred the complaint in its entirety. The court did not address defendants’ Rule 12(b)(6) argument or their request for judicial notice. The court granted defendants’ motion to seal because the materials concerned plaintiffs’ personal financial information. The opinion does not state that the motion to dismiss was granted with or without prejudice.