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WFC Faces Lawsuit Over Interest Rates on Cash Sweep Accounts
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Wells Fargo & Company (WFC - Free Report) faces a new class-action lawsuit, where it has been accused of underpaying interest to clients participating in its cash sweep program.
Sweep programs were created to allow banks and brokers to put their customers' uninvested cash to work. They move excess client cash balances overnight into a money market fund or another higher-yielding product offered by a bank or affiliate bank.
Details of WFC’s Cash Sweep Accounts Lawsuit
The plaintiff, Darren Cobb, alleged that Wells Fargo breached its fiduciary duty, violated principles of fair dealing and committed breach of contract and unjust enrichment. The lawsuit alleged that WFC didn't pay enough interest on uninvested cash while making a significant profit from these funds, leading to substantial financial loss for its clients.
The complaint, submitted on Tuesday, stated that Wells Fargo put its customers' money into its cash sweep program and then used this money to make “outsized returns for itself” by taking advantage of the difference between the interest it earned and the lower rates it provided to clients.
According to the lawsuit, Wells Fargo paid customers in cash sweep accounts just 0.15% interest for most of 2023, while short-term U.S. Treasury Bills yielded around 5.25% — a 36-fold difference. The plaintiffs further alleged that some account holders were paid as little as 0.02% interest on their cash sweep account balances.
Per the lawsuit, the plaintiff and others suffered financial harm as a result of Wells Fargo's alleged misconduct and are entitled to damages, such as restitution and disgorgement of the bank's profits, prejudgment interest on those amounts, attorneys' fees, the cost of the suit and additional relief.
WFC Under SEC's Scrutiny Over Cash Sweep Practices
Wells Fargo has been facing regulatory pressure over the cash sweep program for underpaying interest rates. In 2023, WFC disclosed that the Securities and Exchange Commission (SEC) was investigating the available cash sweep options offered to its advisory customers. In response to rising concerns, in July 2024, the bank announced that it would be increasing the interest rates in its cash sweep program for advisory brokerage customers, a move expected to reduce the bank’s annual earnings by approximately $350 million. This adjustment was intended to “better align with rates paid in money market funds,” according to WFC.
In its second-quarter SEC filing, Wells Fargo provided further details about the ongoing SEC investigation, stating that the regulator is examining the cash sweep options the bank offers to investment advisory clients at account opening. The bank also disclosed that it is involved in resolution discussions with the SEC, although the outcome remains uncertain.
Together with WFC, Morgan Stanley (MS - Free Report) and Raymond James Financial, Inc. (RJF - Free Report) are also under the regulator’s radar for their cash sweep programs.
MS disclosed that it is dealing with two putative class actions concerning its cash sweep programs for retail clients and is currently cooperating with the SEC on the issue.
Similarly, RJF is also facing legal action related to its cash sweep program, alleging that the interest rates paid to RJF’s clients with cash sweep deposits ranged from 0.25% to 3%, significantly lower than the current Fed Funds rate.
WFC’s Other Litigation Probes
Last month, WFC disclosed that the bank is under government authorities' investigations on issues related to anti-money laundering and sanctions programs. The company did not specify which government entity was investigating its practices, nor did it provide specifics related to the issues under scrutiny.
In July, Wells Fargo faced a class action lawsuit alleging that it mismanaged its employee health insurance plan, forcing thousands of U.S.-based employees to overpay for prescription medications. This lawsuit action seeks statutory fines and unspecified damages on behalf of a nationwide class of WFC health plan participants and beneficiaries, which may number in tens of thousands.
Over the past six months, shares of WFC have lost 2.7% against the industry’s growth of 3.7%.
Image: Bigstock
WFC Faces Lawsuit Over Interest Rates on Cash Sweep Accounts
Wells Fargo & Company (WFC - Free Report) faces a new class-action lawsuit, where it has been accused of underpaying interest to clients participating in its cash sweep program.
Sweep programs were created to allow banks and brokers to put their customers' uninvested cash to work. They move excess client cash balances overnight into a money market fund or another higher-yielding product offered by a bank or affiliate bank.
Details of WFC’s Cash Sweep Accounts Lawsuit
The plaintiff, Darren Cobb, alleged that Wells Fargo breached its fiduciary duty, violated principles of fair dealing and committed breach of contract and unjust enrichment. The lawsuit alleged that WFC didn't pay enough interest on uninvested cash while making a significant profit from these funds, leading to substantial financial loss for its clients.
The complaint, submitted on Tuesday, stated that Wells Fargo put its customers' money into its cash sweep program and then used this money to make “outsized returns for itself” by taking advantage of the difference between the interest it earned and the lower rates it provided to clients.
According to the lawsuit, Wells Fargo paid customers in cash sweep accounts just 0.15% interest for most of 2023, while short-term U.S. Treasury Bills yielded around 5.25% — a 36-fold difference. The plaintiffs further alleged that some account holders were paid as little as 0.02% interest on their cash sweep account balances.
Per the lawsuit, the plaintiff and others suffered financial harm as a result of Wells Fargo's alleged misconduct and are entitled to damages, such as restitution and disgorgement of the bank's profits, prejudgment interest on those amounts, attorneys' fees, the cost of the suit and additional relief.
WFC Under SEC's Scrutiny Over Cash Sweep Practices
Wells Fargo has been facing regulatory pressure over the cash sweep program for underpaying interest rates. In 2023, WFC disclosed that the Securities and Exchange Commission (SEC) was investigating the available cash sweep options offered to its advisory customers. In response to rising concerns, in July 2024, the bank announced that it would be increasing the interest rates in its cash sweep program for advisory brokerage customers, a move expected to reduce the bank’s annual earnings by approximately $350 million. This adjustment was intended to “better align with rates paid in money market funds,” according to WFC.
In its second-quarter SEC filing, Wells Fargo provided further details about the ongoing SEC investigation, stating that the regulator is examining the cash sweep options the bank offers to investment advisory clients at account opening. The bank also disclosed that it is involved in resolution discussions with the SEC, although the outcome remains uncertain.
Together with WFC, Morgan Stanley (MS - Free Report) and Raymond James Financial, Inc. (RJF - Free Report) are also under the regulator’s radar for their cash sweep programs.
MS disclosed that it is dealing with two putative class actions concerning its cash sweep programs for retail clients and is currently cooperating with the SEC on the issue.
Similarly, RJF is also facing legal action related to its cash sweep program, alleging that the interest rates paid to RJF’s clients with cash sweep deposits ranged from 0.25% to 3%, significantly lower than the current Fed Funds rate.
WFC’s Other Litigation Probes
Last month, WFC disclosed that the bank is under government authorities' investigations on issues related to anti-money laundering and sanctions programs. The company did not specify which government entity was investigating its practices, nor did it provide specifics related to the issues under scrutiny.
In July, Wells Fargo faced a class action lawsuit alleging that it mismanaged its employee health insurance plan, forcing thousands of U.S.-based employees to overpay for prescription medications. This lawsuit action seeks statutory fines and unspecified damages on behalf of a nationwide class of WFC health plan participants and beneficiaries, which may number in tens of thousands.
Over the past six months, shares of WFC have lost 2.7% against the industry’s growth of 3.7%.
Image Source: Zacks Investment Research
Wells Fargo currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.