Wirehouses, including Wells Fargo, Merrill Lynch, and Morgan Stanley, are facing a new wave of class action lawsuits. These complaints allege that the firms have generated significant revenue at the expense of their clients through cash sweep programs, which automatically transfer uninvested cash into lower-yielding accounts.
Key Takeaways
Wells Fargo, Merrill Lynch, and Morgan Stanley are named in separate class action lawsuits.
Allegations focus on the firms profiting from cash sweep programs that offer lower interest rates.
The lawsuits echo previous complaints against various financial institutions regarding similar practices.
Overview of the Lawsuits
The recent lawsuits come on the heels of Wells Fargo's announcement of a $128 million loss in net interest income for the third quarter of 2024, attributed to increased sweep deposit rates. During a recent earnings call, Wells Fargo's CFO, Michael Santomassimo, noted a $233 million dip in net interest income between the second and third quarters, with a significant portion linked to the pricing of sweep deposits.
In addition to Wells Fargo, Safron Capital Corporation has filed separate suits against Bank of America Merrill Lynch and Morgan Stanley, while Brickman Investments has targeted Wells Fargo. All complaints have been filed in New York’s Southern District, with Robbins Geller Rudman & Dowd and Abraham Fruchter & Twersky representing the plaintiffs.
Allegations Against Wells Fargo
The complaints against Wells Fargo detail how the firm automatically sweeps clients' uninvested cash into “interest-bearing” deposit accounts. However, the plaintiffs argue that Wells Fargo has a conflict of interest, profiting from the spread earned by its affiliated banks on these deposits. The interest rates offered in the sweep programs reportedly range from 0.02% to 0.2%, significantly lower than competitors and the Federal Reserve's benchmark rate.
The lawsuits claim that Wells Fargo Advisors violated fiduciary duties and failed to provide clients with a comparable duty of care as mandated by the SEC’s Regulation Best Interest rule. The plaintiffs allege that misleading statements were made regarding the interest rates, which were consistently lower than those available for direct deposits.
Broader Implications for the Industry
These lawsuits are part of a broader trend, as several wirehouses, including LPL, Raymond James, Ameriprise, and UBS, have faced similar class action complaints in recent months. A California federal judge recently ordered a class action suit against Wells Fargo to be consolidated with other similar cases.
Bank of America Merrill Lynch has acknowledged potential legal and regulatory risks associated with its cash sweep program, while Morgan Stanley is also under SEC investigation for its practices related to advisory cash balances.
Responses from the Firms
Merrill Lynch has declined to comment on the ongoing litigation, while Wells Fargo has not responded to requests for comment. Morgan Stanley, on the other hand, has labeled the claims as “baseless and plainly without merit,” asserting that the cash sweep program is fully disclosed to clients who consent to it when opening their accounts. The firm has vowed to defend itself vigorously against these allegations.
As these class action lawsuits unfold, they could have significant implications for the wirehouse industry, potentially leading to increased scrutiny and regulatory changes regarding cash management practices.
Sources
Wirehouses Face More Cash Sweep Class Actions, WealthManagement.com.