Wells Fargo faces another potential class action lawsuit in the growing controversy embroiling the bank’s cash sweep deposit programs.
Scotch Plains, N.J.-based Daniel Varady filed his suit seeking a class action in California federal court. His accusations mirror other recent calls for class actions of cash sweep programs against Wells Fargo, LPL and Ameriprise. Varady argues the bank was obligated to negotiate “reasonable” rates of return for clients’ uninvested cash.
“While Wells Fargo customers received artificially and unreasonably low rates, Wells Fargo received the difference between what it agreed to pay its customers and what the programs banks are willing to pay Wells Fargo for the large cash deposits—an amount that is not disclosed to Wells Fargo customers,” the complaint read.
Like many firms, Wells Fargo will often take client cash not being used for trading and transfer it (or “sweep” it) into “interest-bearing” accounts at banks, many of whom are affiliated with Wells Fargo, according to the suit.
But Varady alleged that customers’ Wells Fargo accounts have low rates of return, as low as 0.05% for accounts with less than $1 million in assets (compared to an average savings account interest rate of 0.45%).
Varaday argued that those interest rates with Wells Fargo-affiliated banks were set “in consultation” with the bank and that unaffiliated banks were required to set their rates the same as the affiliated banks to participate in the sweep program.
“This kept the interest Wells Fargo customers earned on their cash sweep deposits artificially low and was a breach of Wells Fargo’s legal and contractual obligations to its customers,” the complaint read.
The complaint flagged Wells Fargo’s acknowledgment late last year that the Securities and Exchange Commission was investigating the firm’s cash sweep program and that last month, Wells Fargo revealed it would increase the interest rates in its cash sweep programs, reducing the firm’s revenue by approximately $350 million per year.
“Thus, Wells Fargo had an obvious financial incentive to maintain the artificially low interest rates to keep the ‘spread’ that it earns, i.e., net income, higher than it otherwise would have if Plaintiff and Class members had received a reasonable rate of interest,” the complaint read.
Wells Fargo did not return a request for comment prior to publication, though its most recent quarterly filing noted the firm was "in resolution discussions with the SEC," although it couldn’t say with certainty what the outcome of the discussions would be.
In addition to Wells Fargo, both Bank of America and Morgan Stanley revealed plans to change their sweep pricing. However, LPL Financial CEO Dan Arnold said that his firm had “no plans” to change its sweep policies (like Wells, LPL faces several lawsuits seeking class actions related to cash sweeps).
Last week, Morgan Stanley also revealed the SEC was probing its cash sweep programs, as Wells Fargo admitted last year. Morgan Stanley is also facing two lawsuits related to its cash sweep programs, according to recent SEC filings.
According to Max Schatzow, a partner with RIA Lawyers, the reason so many firms are defendants in cash sweep pricing suits now is the rise in interest rates over the past several years. Shatzow noted that when interest rates were at zero or around that point, most people did not care what cash sweep program was used or what the rates were.
"At that stage, there weren’t any claimant’s lawyers willing to entertain these cases,” he said. “But, with rates rising, I think there are people willing to argue that their broker/dealer may not have met their duty owed to clients.”
