Lawsuits over firms' "cash sweeps" kept piling up on Wednesday with two new complaints filed against
The latest suits were brought by the same group of law firms that have
The term "cash sweeps" refers to firms' policy of taking clients' uninvested cash and moving it into low-yielding bank accounts. Plaintiffs' lawyers have been arguing in a rapidly growing pile of lawsuits that wealth managers could easily do better by investors simply by putting their cash into money markets, which now pay around 5%.
LPL and
Wells declined to comment for this article. A spokesperson for LPL said, "Designed primarily for short-term cash holdings, our FDIC-insured cash sweep vehicles prioritize security, liquidity and yield — in that order. We also offer investment options suitable for a longer-term horizon, such as money market funds, CDs and fixed income funds. This flexibility allows our clients to tailor their investment strategies to align with their risk tolerance and financial goals."
The latest suits against LPL and Wells — brought by Simmons Hanly Conroy of San Francisco, Williams Dirks Dameron of Kansas City and Oakes & Fosher of St. Louis — were also filed in California. Both were submitted on the behalf of individual plaintiffs: a Hawaii resident named Edward Nadolny, a former Wells customer, and an Illinois resident named Douglas Nevitt, a former LPL customer. But like all the recent "sweeps" lawsuits, they also seek class-action status to pursue similar claims for other plaintiffs allegedly injured in the same way.
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Plaintiffs' lawyers filling regulatory vacuum?
All of these legal actions so far rely heavily on financial advisors' fiduciary obligation to always put their clients' interests first. The legal team in the latest suits against Wells and LPL — and their previous actions against Morgan Stanley and Ameriprise — also invoke Regulation Best Interest, which calls on brokers to do their best for clients while also disclosing conflicts of interest.
Bill Singer, a longtime securities lawyer and recently retired author of the
"This is what happens when you have a failure of regulation," Singer said. "Now the plaintiffs' bar is going to make a third of whatever money comes out of these cases. But we are finally realizing there is a problem here."
The Securities and Exchange Commission has gone after firms for alleged failures to play fair with their cash sweeps policies. In 2022, it reached
Louis Straney, a regulatory expert at
"Unfortunately, this often impacts the smaller investor disproportionately since they generally do not understand that abuses in this system work entirely to the firm's benefit," Straney said. "Plus, most disclosures associated with interest paid or charged are hidden in the fine print of customer agreements."
Big interest rate spreads
In the latest action against Wells, the lawyers pressing the case use one of the same tactics they employed in the cases against Morgan Stanley and Ameriprise. Namely, they compare the yields paid on the firms' sweeps accounts with easily available cash investing options offered by rival brokerage businesses.
Wells, for instance, was recently paying 0.05% on anything less than $1 million held in some of its sweeps accounts, according to the suit. Vanguard and InteractiveBrokers meanwhile pay 4.6% and 4.83%, respectively, for the same amounts, the suit states. Even Wells clients who have $10 million or more in a sweeps account were receiving only 0.5%, the plaintiffs' lawyers allege.
Meanwhile, according to the suit, Wells can receive as much as 5.63% on cash that's swept over to affiliated and unaffiliated banks and then lent out. By keeping most of the money generated that way for itself, instead of paying it to clients, Wells has secured a powerful boost to its bottom line, the suit alleges.
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The suit acknowledges that Wells recently stated in its second quarter earnings call that it was raising the rates it pays on some of its sweeps accounts. But the lawyers note the change, expected to cost the firm about $350 million this year, only came after Wells had disclosed it was under investigation by the Securities and Exchange Commission over its sweeps policies.
The suits against Wells and LPL accuse both firms of breaching their fiduciary duties and obtaining unjust enrichment. The action against Wells also alleges breach of contract.
Those allegations mirror those being lobbed by the second legal team now bringing "sweeps" cases. Those firms — Berger Montague of Philadelphia and Rosca Scarlato of Beachwood, Ohio — have similarly accused Wells and LPL of breach of fiduciary duty, gross negligence and negligent misrepresentation, among other violations. Morgan Stanley and
Defenders of sweeps generally argue that the accounts give investors a place to hold their cash for the short term while they decide if they want to put it into stocks, bonds or other investments. They also note that sweep accounts can offer protection from the Federal Deposit Insurance Corp., which guarantees up to $250,000 on individual accounts.
— This article has been updated with comments from LPL and industry experts as well as other insights.
