Wells Fargo, Merrill Lynch and Morgan Stanley are facing separate class action complaints accusing the wirehouses of generating “massive revenue” to the detriment of clients through their cash sweep programs.
The three suits, which mirror similar class action complaints filed against numerous firms over the past several months, come after Wells Fargo revealed that it lost $128 million in net interest income during 2024’s third quarter after it increased its sweep deposit rates.
In a third-quarter earnings call Friday morning, Wells Fargo Chief Financial Officer Michael Santomassimo said the firm’s net interest income dipped $233 million (or 2%) between the second and third quarters. According to Santomassimo, $128 million of that drop was due to “the increased pricing on sweep deposits and advisory brokerage accounts and wealth and investment management.” Santomassimo also said sweep deposit pricing and advisory brokerage accounts would continue to align with Fed rate cuts. Wells’ revenue in its wealth and investment management division increased 5% year-over-year due to higher asset-based fees driven by market valuations and transaction activity, despite the net interest income dip from sweep deposit rate increases (down 16% YoY for the division).
Meanwhile, the Minneapolis-based Safron Capital Corporation brought separate suits against Bank of America Merrill Lynch and Morgan Stanley, while Brickman Investments sued Wells Fargo. The complaints were brought in New York’s Southern District, with Robbins Geller Rudman & Dowd and Abraham Fruchter & Twersky listed as the plaintiffs’ firms in all three suits.
In the Wells Fargo complaint (similar in content and language to the other two), the plaintiffs described how the firm would automatically sweep eligible clients’ uninvested cash balances into “interest-bearing” deposit accounts.
However, Wells faced a conflict of interest by profiting from the spread its affiliated banks earned on those deposits. According to the complaint, they were motivated to enroll clients in the sweep programs even if those sweep accounts paid lower interest rates to customers. The plaintiffs alleged the sweep program rates ranged from 0.02% to 0.2%, lower than many competitors’ rates and the Fed’s benchmark federal funds rate.
Last September, Wells Fargo revealed that the SEC was investigating its sweep practices. In August, the firm disclosed it was in “resolution discussions” with the commission. The firm also announced late in the second quarter that it would increase pricing on sweep deposits in advisory brokerage accounts, which they expected could lead to an annual $350 million revenue loss.
In the suit, the plaintiffs argued Wells Fargo Advisors’ conduct violated fiduciary duties while also owing clients a comparable duty of care to retail clients via the SEC’s Regulation Best Interest rule.
According to the complaint, Wells made misleading statements when telling clients that rates may be lower than rates for clients making deposits directly. In reality, the sweep program interest rates were always significantly lower than those of customers making direct deposits (the complaint alleged that Wells Fargo amended its disclosure documents around the time it revealed the SEC investigation to say sweep rates were “typically” lower).
In each suit, the plaintiffs want class action complaints to represent the clients affected by each firm’s alleged conduct.
Wells Fargo, Morgan Stanley and others, including LPL, Raymond James, Ameriprise and UBS, have all been named defendants in previously filed class action complaints. Last Friday, a California federal judge ordered a class action suit filed in the state against Wells Fargo to be consolidated with several similar suits also filed in recent months.
Bank of America Merrill Lynch disclosed in SEC filings that it could face legal and regulatory risks due to its cash sweep program. In August, Morgan Stanley disclosed it faced its own SEC probe related to “advisory cash balances swept to affiliate bank deposit programs.”
Merrill Lynch declined to comment, and Wells Fargo did not return a request for comment as of press time.
Morgan Stanley believed claims in the suit were “baseless and plainly without merit,” according to a spokesperson for the firm.
“The cash sweep program is fully disclosed to clients, who consent to it in connection with the opening of their account,” the spokesperson said. “The firm will defend itself against this and the other claims vigorously."
