Cash Sweep Lawsuits

Morgan Stanley, Charles Schwab, Merrill Lynch, Ameriprise, and LPL Financial are facing new lawsuits over returns on cash sweep accounts. Brokerage firms earn interest on money invested in cash sweep accounts, creating an incentive to recommend sweep accounts to their clients. According to the lawsuits, these firms failed to disclose to their customers that they were earning substantial yields while investors earned relatively low returns.

How Cash Sweeps Work

Cash sweep accounts “sweep” uninvested cash into interest-bearing accounts. Instead of waiting for the investor to direct the broker on how to invest the uninvested funds, any amount above a predetermined threshold is sent to another account, like a money market fund.

Alleged Rule Violations

Some lawsuits argue that these firms are violating Regulation Best Interest in brokerage accounts by failing to act in their client’s best interests and failing to adequately disclose how the firms used these cash sweep accounts. In theory, these sweeps should increase efficiency for investors and maximize returns.

The Wall Street Journal reported in 2018 that several firms had stopped depositing money from cash sweeps into money market funds and instead moved money to affiliated bank accounts. These accounts earn substantially more interest than what the cash sweep accounts offer customers, allowing firms to pocket the difference for themselves. Today, increased regulatory scrutiny of cash sweep accounts indicate that brokerage firms have found this profitable endeavor too tempting to resist.

Wells Fargo Advisors

One Wells Fargo Advisors lawsuit alleges that following an SEC investigation, Wells Fargo Advisors agreed to change the interest rate provided to cash sweep customers. The firm disclosed that the change in the interest rate provided to cash sweep customers would cost the firm $350 million – $350 million that Wells Fargo Advisors would evidently have kept themselves had it not been for the SEC investigation. Wells Fargo Advisors allegedly used affiliated banks to invest its cash sweep deposits and accepted the artificially low rates set by those banks instead of negotiating for fair rates on behalf of its customers.

Morgan Stanley

According to another class action lawsuit, Morgan Stanley earned $8 billion in 2023 by loaning out its customers’ cash sweep funds via affiliated bank accounts, all while offering a paltry 0.01% to 0.5% on uninvested cash deposits.

Charles Schwab

Class action lawsuits are not the only concern for brokerage firms accused of offering unfair cash sweep returns. Charles Schwab is the subject of a regulatory action from the SEC for its failure to disclose its practices surrounding cash sweeps.

In 2022, the SEC ordered Charles Schwab to pay $187 million to its clients to settle charges that the firm failed to disclose that it was sweeping cash into affiliated bank accounts and then loaning out the funds. The SEC alleges that Charles Schwab kept the difference between the interest on the loans and the lower interest rates paid to customers.

LPL Financial

In July 2024, a class action lawsuit alleged that LPL Financial failed “to pay or secure for its clients a reasonable rate of interest on the cash balances in its Automatic Cash Sweep Program.” Meanwhile, LPL Financial allegedly makes “more money if its clients’ funds are invested in the cash sweep program rather than in similar cash options and equivalents.”

Merrill Lynch

A 2023 suit filed against Merrill Lynch alleged that the firm violated its customer service agreement by failing to pay “reasonable rates of interest” on cash swept to affiliated bank accounts. These accounts allegedly paid only 0.01% to 1.06% interest, while similar accounts at other firms paid interest rates of 2.72% to 4.15%.

Ameriprise

July 2024 saw another cash sweep lawsuit,  this time lobbed at Ameriprise. The lawsuit states that Ameriprise offered rates of cash sweep rates of 0.3% while the federal funds rate is 4.12%.

Kurta Law Can Help

If you have worked with one of the brokerage firms mentioned in a cash sweep lawsuit, you should review your account statements carefully and review any suspicious losses with an investment fraud lawyer. Contact Kurta Law for a free case evaluation today – call (877) 600-0098 or email info@kurtalawfirm.com.