A new class-action lawsuit accuses Wells Fargo of underpaying interest to clients in its cash sweep program.
In the proposed class action brought against the San Francisco-based lender, plaintiff Darren Cobb accuses Wells Fargo of breach of fiduciary duty, fair dealing, breach of contract and unjust enrichment.
“Wells Fargo underpaid its customers in violation of its fiduciary and contractual duties in order to enrich itself at its customers’ expense,” according to the lawsuit, filed Tuesday in the U.S. District Court for the Northern District of California. “Rather than pay its customers a reasonable rate of interest on their cash as it was required to do, Wells Fargo instead paid minuscule rates to its customers, while it earned hundreds of millions of dollars on that cash due to rising interest rates.”
This lawsuit follows another, filed last month by a Wells Fargo wealth management client.
Typically, in a cash sweep program, a brokerage firm moves a customer’s uninvested cash from a brokerage account into an interest-bearing account.
Tuesday’s complaint alleges Wells Fargo puts customers’ money into the cash sweep program and uses the cash to generate “outsized returns for itself” due to the difference between the interest income it earns and that it pays its clients.
Wells Fargo paid cash-sweep account customers 0.15% interest for the most of 2023, while the yield on short-term U.S. Treasury Bills hovered around 5.25% for most of last year — a 36-fold gap, according to the lawsuit. The plaintiff further alleges that the lender pays account holders 0.02% interest on their cash sweep account balances.
The complaint pointed out that Fidelity, a Wells rival, sweeps uninvested cash in its clients’ brokerage accounts into a money market fund earning roughly 5%.
A Wells Fargo spokesperson declined to comment to Banking Dive.
The bank has faced regulatory scrutiny for underpayment of interest rates in cash sweep accounts and other alleged misconduct. Last fall, Wells Fargo disclosed that the Securities and Exchange Commission was reviewing the cash sweep options it offered its advisory clients.
In July, the lender said during an earnings call that it was raising the rates in its cash sweep program held by advisory brokerage customers. The change, which will reduce the bank’s earnings by roughly $350 million annually, will “better align with rates paid in money market funds, ” the bank said.
Last month, Wells Fargo’s quarterly report disclosed details about the SEC probe and said the regulator “has undertaken an investigation regarding the cash sweep options that the Company provides to investment advisory clients at account opening.” The bank “is in resolution discussions with the SEC, although there can be no assurance as to the outcome of these discussions,” the filing said.
Recent quarterly filings reveal that Wells Fargo is just one of many financial institutions facing potential regulatory scrutiny over their cash sweep programs. Morgan Stanley said it is facing two putative class actions regarding its cash sweep programs for its retail clients, adding that the bank is working with the SEC on the matter. Broker-dealer LPL Financial acknowledged facing a class-action lawsuit filed in July over its cash sweep policy. Bank of America, too, said that it could face potential regulatory risks related to “the rates paid on uninvested cash in investment advisory accounts that is swept into interest-paying bank deposits.”
The Tuesday lawsuit claims the plaintiff and others suffered financial harm from Wells Fargo’s alleged misconduct and are entitled to damages, including the restitution and disgorgement of the profits the bank made, prejudgment interest on those amounts, attorneys' fees, cost of the suit and further relief.
