In strikingly similar orders, separate judges have dismissed parts of lawsuits brought by investors against LPL Financial and Wells Fargo over their cash sweeps policies.
The orders, which both found that neither Wells nor LPL had a fiduciary duty to at least some of their clients who had entrusted them with uninvested cash, allow the suits to proceed but under modified terms. Wells Fargo and LPL Financial are among a large group of wealth managers that plaintiff lawyers have taken to task over the past year in a series of putative class-action lawsuits alleging abuses in their “cash sweeps” policies.
Cash sweeps refers to firms’ common practice of taking uninvested cash investors have sitting in brokerage or advisory accounts and moving it over to affiliated banks or unaffiliated banks, where it can be lent out or invested. The rash of lawsuits generally accuses wealth managers of keeping the lion’s share of the resulting returns for themselves and letting too little flow back to clients.
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No fiduciary duty with cash held in brokerage accounts
The now-partially dismissed suits against LPL Financial and Wells Fargo were filed last year. The suit against LPL was filed in July 2024 by a Michigan resident named Daniel Peters, who accused LPL of offering “paltry” returns through its cash sweeps policies. Two other plaintiffs with similar accusations, Douglas Nevitt and Hieu Vu, later consolidated their cases with Peters’.
Similarly, the action against Wells Fargo was initially filed in July 2024 by a New Mexico resident named Keith Bujold and later consolidated with cases brought by another pair of plaintiffs, Edward Nadolny and Darren Cobb. Like many similar complaints, the suit against Wells compared the returns it was offering on its sweeps accounts to those that clients could have obtained if they had entrusted their money to rival firms.
Wells Fargo had been paying 0.05% on anything less than $1 million held in some of its sweeps accounts, according to the suit. Vanguard and InteractiveBrokers meanwhile paid 4.6% and 4.83%, respectively, for the same amount, the suit stated. Meanwhile, according to the suit, Wells was receiving as much as 5.63% on cash it swept over to affiliated and unaffiliated banks and then lent out.
The plaintiffs in that case alleged in part that Wells Fargo’s sweeps policies violated investment advisors’ fiduciary duty to always put their clients’ interests first. But the judge overseeing the dispute, Vince Chhabria of the federal district court for Northern California, found that obligation does not apply to client cash that’s merely held in brokerage accounts and not actively managed by a financial advisor.
Firms caught up in these lawsuits have long maintained that their sweeps policies are meant to give clients a place to temporarily park cash before deciding how they want to invest it. Rather than the fiduciary duty, the brokerage accounts used by many clients are subject to Regulation Best Interest, a looser conduct standard that places greater emphasis on disclosing conflicts of interest.
“There is no default duty for a broker like Wells Fargo to provide investment advice on uninvested cash, and the complaint does not allege that any of the contracts created such a duty, nor does it allege that Wells Fargo had any discretionary authority to move cash in and out of the cash sweep program on the customer’s behalf,” Judge Chhabria wrote in an order dated June 27.
Similarly, the judge in the LPL Financial case found that LPL owed no fiduciary duty to investors holding money in its sweeps accounts. Judge Todd Robinson of the federal district court for Southern California found in an order dated June 30 that it was up to LPL clients themselves to keep uninvested cash in their brokerage accounts, not LPL advisors.
Citing a previous case — Blasio v. Merrill Lynch & Co — Robinson quoted: “By definition, free credit balances existed in Plaintiffs’ brokerage accounts because Plaintiffs chose not to invest these funds and instead left them idle in their accounts.”
Breach-of-contract claim allowed with Wells, dismissed with LPL
The two judges did diverge on the key aspect of whether the plaintiffs in their respective cases could bring breach-of-contract claims. Chhabria found that the plaintiffs do have grounds to pursue their allegations that Wells Fargo violated contractual agreements with its clients.
In a disclosure to investors, the judge noted, Wells said, “While we have policies and procedures designed to pay a reasonable rate of interest based on prevailing interest rates at other or similar financial services firms, our rates are not always the highest interest rates available.”
Chhabria noted that even though the Federal Reserve began raising its benchmark interest rate in 2022 in a bid to tame inflation, “Wells Fargo’s rate barely changed at all in response.”
“While there is no expectation that Wells Fargo’s rate matches the federal funds rate, it is plausible that the reasonableness of an interest rate should track the trajectory of the federal funds rate, i.e., when the federal funds rate increases significantly, what is considered ‘reasonable’ should also increase as well,” he wrote.
In the LPL case, Robinson dismissed a breach-of-contract claim, noting that the firm had pledged in writing to act in clients’ interests only when it was making recommendations as a broker-dealer or an investment advisor.
“Consequently, LPL has breached this provision only if it recommended the Cash Sweep Programs to Plaintiffs as their broker-dealer or placed Plaintiffs’ uninvested cash in the Cash Sweep Programs as their investment adviser,” Robinson wrote.
Judge says plaintiffs have ‘uphill battle’
Robinson did find grounds for allowing the plaintiffs in the LPL case to pursue their claims of breach of an implied covenant. In language similar to Chhabria’s in the Wells case, Robinson wrote that the plaintiffs suing LPL most likely had good reason to believe LPL would raise its sweeps rates to mirror increases in the Fed’s target and bank deposit rates.
Robinson said the plaintiffs have an “uphill battle” ahead of them, but that it may have been reasonable for them “to believe that, as ‘the amount Banks are willing to pay’ increased, the interest that LPL passed along to them would increase in turn.”
“But the opposite occurred,” Robinson added, “even though the interest rates paid by other brokerages who swept client cash balances into unaffiliated banks generally rose to track the movement of the market.”
Lawyers for the plaintiffs in the two cases did not return requests for comment. A Wells Fargo spokesperson declined to comment on the order in their case, and an LPL representative did not respond to a request for comment.
Plaintiff lawyers haven’t been the only ones subjecting firms’ cash sweeps to scrutiny. In January, Wells Fargo and Merrill agreed to pay $60 million in total to settle Securities and Exchange Commission allegations that they hadn’t done enough to take clients’ interests into consideration when devising their sweeps policies.
Around the same time, Morgan Stanley’s cash sweeps were also being looked into by the SEC. But Morgan Stanley reported in a quarterly filing in May that the regulator had decided against recommending “an enforcement action against the Firm.”
Investors vote with their feet, go to money markets
Much of the criticism of firms’ sweeps policies has centered on the fact that clients could have easily secured higher returns by investing money in other ways. In the periods cited in many of the recent lawsuits, many high-yield savings accounts and money market funds were paying around 5% interest on cash.
Peter Crane, the president of the money-market tracker Crane Data and the publisher of the Money Fund Intelligence newsletter, expressed skepticism about the plaintiff lawyers’ implication that brokerage firms are somehow using sweeps accounts to hold clients’ cash hostage. He noted that the amount of money moved into money markets has been hitting record highs in recent years.
That’s happened even as the average yield paid by money markets has fallen to just over 4%. The average return on sweeps accounts holding $100,000, meanwhile, is about 0.4%, Crane said.
Even though money market yields are expected to continue trending downward, the amount of money held in the funds hit a record high of $7.45 trillion this week, he said.
“Investors obviously don’t need a lawsuit to tell them money funds are yielding 10 times what sweeps are,” Crane said.
Judges set deadlines for plaintiffs to submit amended complaints
So far, most of the court cases questioning firms’ cash-sweeps policies are waiting for their presiding judges to certify them as class actions, which would allow investors with similar allegations to join. In the now-partially dismissed suit against Wells Fargo, Judge Chhabria gave the plaintiffs 21 days to submit an amended complaint; in the case against LPL, the plaintiffs were given 30 days to amend their complaint or submit a notice of intent to proceed regarding their surviving claims.
While finding the LPL plaintiffs had grounds for pursuing allegations of breach of an implied covenant, Judge Robinson also said they had shown reason for a claim of unjust enrichment against the firm. Chhabria, by contrast, dismissed an accusation of unjust enrichment against Wells Fargo after citing precedent that such claims are “precluded if a valid and enforceable written contract, even an implied contract, governs the relevant subject matter.”
“Here, even though the parties dispute the meaning of express terms of the contracts, both parties agree that the contracts are valid and enforceable and cover the relationship between Wells Fargo and its cash sweep clients,” Chhabria wrote.
The judges also rebuked the plaintiffs’ attempts to hold both firms’ parent companies liable. Judge Chhabria also rebuked the Wells Fargo plaintiff’s allegations against Wells Fargo Advisors Financial Network, or FiNet, the firm’s channel for independent advisors. In dismissing the claims against Wells Fargo & Company, Chhabria wrote, “WFC is the parent company, and the complaint fails to plead facts sufficient to hold it liable for the actions of its subsidiary under any alter ego or agency theory.”
“FiNet,” he added, “is dismissed for lack of standing because no plaintiff had an account with FiNet and no plaintiff pled any relationship with FiNet.”
