Another institution, J.P. Morgan, is in the legal crosshairs over accusations related to its cash sweep program.
Illinois resident Dan Bodea filed a lawsuit last week in New York’s Southern District demanding a class action against J.P. Morgan Securities. Bodea alleges that some of his J.P. Morgan account’s excess cash was automatically transferred or “swept” into an interest-bearing bank account at JPMorgan Chase Bank, akin to similar policies at many other firms that have become fodder for a spate of lawsuits filed in recent weeks.
In this latest suit, Bodea argued the firm had a fiduciary responsibility that it continually broke by shortchanging client accounts that “receive only a minimal return on their cash deposits,” as well as concealing these benefits from clients through employing “inaccurate, misleading or oblique disclosures,” according to the complaint.
Bodea alleges that J.P. Morgan Securities defined itself as acting as his “exclusive custodian and agent” and that JPMorgan Chase Bank was the only option when clients’ cash was swept into interest-bearing accounts. According to Bodea, the firm was a kind of “double agent,” benefitting itself and its affiliate firms when it should have been acting in clients' best interests
According to Bodea, the only disclosures about what the bank was earning on clients’ swept cash were references to the spread between what the bank earned and paid out. But, he argues, he and other customers weren’t informed of the “interest rate and other income earned” by the bank and J.P. Morgan Securities.
These transactions held “unreasonably” low interest rates for customers in the program, according to Bodea.
“While (JPMorgan Chase Bank), acting as a bank vis-à-vis the (J.P. Morgan Securities)’ customers’ cash in the Program, is not a fiduciary of those customers and can establish whatever ‘spread’ it could negotiate in arm's length transactions with its depositors, (J.P. Morgan Securities) is a fiduciary of those customers, and in that capacity was required to put their customers’ interests first – not (JPMorgan Chase Bank)’s – while negotiating and entering into transactions with (JPMorgan Chase Bank) regarding the Program,” the complaint read.
J.P. Morgan is the latest in several firms to face cash sweep-related class action suits, including complaints filed against UBS, LPL and Ameriprise just last week.
Attorneys with the Philadelphia-based “class action law firm” Berger Montague are representing Bodea, and they’re also representing clients in several other cash sweep-related cases (including prior suits against LPL, Wells Fargo and Ameriprise).
The firm announced late last week that it was hiring attorney Alex Heller to assist with the growing number of cash sweep-related cases (Heller is named one of the attorneys representing Bodea).
Last month, Morgan Stanley revealed that it was facing SEC probes into its cash sweep programs. Wells Fargo’s most recent quarterly filings indicated that it was in “resolution discussions” with the commission about an inquiry the firm first disclosed late last year.
Moody’s has warned wirehouses and other firms that continued investigations into cash sweep programs could negatively impact their credit ratings by lowering the revenue from clients’ uninvested cash and boosting legal and regulatory costs.
In recent quarterly earnings reports and calls, UBS, Wells Fargo, BofA, and Morgan Stanley said they were reassessing their sweep deposit programs.
