Client Alert

More Subprime Fallout: Court Finds Private Right of Action Under Investment Company Act of 1940 for Violation of Investment Objectives

April 13, 2009

Grace Carter and Lee Kissman


In a case of first impression, dealing with a bond funds investments in collateralized mortgage obligations, a District Court in the Ninth Circuit has ruled that investors (or their investment advisors) may have an implied right of action against a mutual fund under Section 13(a) of the Investment Company Act of 1940 (the ICA) for deviating from the funds stated investment objectives. Northstar Financial Advisors, Inc. v. Schwab Investments, et al., No. C 08-4119 SI, 2009 WL 415616 (N. D. Cal., Feb. 19, 2009). Strikingly, the Northstar decision represents the first case since 2002 to find an implied private right of action under the ICA. In refusing to dismiss a class action alleging that a fund harmed investors by investing in high-risk mortgage-backed securities, some plaintiffs may claim that the court has opened a new front in the plaintiffs bars efforts to capitalize on the subprime crisis through investor class actions.

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