Joe McConnell
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The U.S. Securities and Exchange Commission is investigating allegations that Wells Fargo, Morgan Stanley and other Wall Street groups systematically defrauded customers of billions of dollars in interest payments.
The investigation into “cash sweep” accounts comes as several companies have increased the interest they are paying customers. But the rates offered to savers, particularly by the nation’s largest banks, remain far lower than the returns paid to banks under the short-term interest rates set by the Federal Reserve.
The problem arose because of idle money sitting in customer accounts at brokerage firms and big banks, which “sweep” otherwise uninvested funds into interest-bearing alternatives to generate income. The SEC is looking into whether the groups steered those customers into sweep accounts that earned little or no interest, and whether financial advisers at those firms had a fiduciary duty to advise customers that they could get higher returns if they moved their money into other accounts.
“You’re talking about a huge transfer of wealth from the client to the brokerage firm,” said Robert Finkel, a senior partner at Wolf Popper, who filed a lawsuit in February against Morgan Stanley on behalf of clients over the matter. “You’re talking about billions of dollars.”
Morgan Stanley said in a securities filing Monday that the SEC first asked about the matter in April. The bank, which is fighting the case, declined to comment.
The regulator is handling the investigation as a so-called sweep, in which it quizzes a range of companies on a specific issue to see how some of them deviate from industry practices.
The SEC declined to comment.
Wells Fargo said last week it was engaged in “resolution talks” with the SEC over the matter in a financial filing. It declined to comment for this article.
In its quarterly securities filing, Bank of America also said it was under scrutiny for the rates it paid customers on uninvested money that was moved into interest-paying bank deposits. The bank declined to comment.
Additionally, in recent weeks LPL Financial and Ameriprise have been sued on behalf of customers.
Last month, two private class actions were filed against LPL, the largest independent broker-dealer in the United States, over cash sweep accounts, and another against Ameriprise. Wells Fargo, already facing lawsuits from customers, was hit with two more class actions in July.
All cases are similar in their allegations that brokerage firms put their own profits ahead of customers, pocketing much of the interest earned on customers’ cash balances and penalizing customers.
“Defendants’ misconduct has been and continues to be extremely profitable to Defendants, but has been and continues to be extremely harmful to their clients, in flagrant breach of their duties to their clients,” the plaintiffs in the Ameriprise case argued.
LPL acknowledged the lawsuits in a recent SEC filing and said it would defend itself “vigorously.” In a statement, the company noted that its cash sweep vehicles prioritized “safety, liquidity and yield, in that order,” and noted that it offered other investment options that were better suited for longer investment horizons.
Wells Fargo, which earlier this year paid just 0.05 percent interest on sweep accounts, recently increased the rate it pays on its default sweep accounts. In a call with analysts, the bank estimated that the rate increase would reduce the bank’s interest income by $350 million this year.
Additional information provided by Joshua Franklin in New York
This story has been updated to clarify which companies are under scrutiny by regulators and which have been sued on behalf of customers.
