Case Overview: A class action lawsuit has been filed against Charles Schwab, alleging the company misused customer funds in its cash sweep program to finance its acquisition of TD Ameritrade.
Consumers Affected: Charles Schwab customers who participated in the cash sweep program.
Court: U.S. District Court for the Central District of California
Charles Schwab is facing a class action lawsuit that claims the brokerage giant misused funds from its cash sweep program to finance its acquisition of TD Ameritrade.
Consumers allege that Schwab breached its fiduciary duty by directing customers’ uninvested cash into accounts at its affiliated banks, primarily benefiting Schwab and its partners and at the expense of the consumers it is supposed to serve.
The lawsuit alleges that Schwab used this cash to secure a deal with TD Bank, which played a crucial role in the acquisition of TD Ameritrade, all while providing minimal returns to customers.
Schwab customers Mary Loughran, Rosemary Orlando, and Edward Carr, all users of the company’s cash sweep program, filed the proposed class action lawsuit alleging violations of California business law.
The group’s uninvested cash was automatically transferred into deposit accounts at Schwab-affiliated banks, while they believed their funds were being managed in their best interest. However, the lawsuit alleges that Schwab took the majority of the compensation earned from this cash for itself and its affiliates, leaving customers with only minimal returns.
The plaintiffs argue that Schwab failed to disclose how their cash was being used, particularly in relation to the acquisition deal with TD Ameritrade. “Defendants’ gross negligence directly and proximately caused harm to Plaintiffs and the members of the proposed Class,” the lawsuit states.
A cash sweep program automatically transfers uninvested cash from a brokerage account into interest-bearing deposit accounts at designated banks. In Schwab’s case, the program was designed to provide customers with FDIC insurance on their cash deposits while also allowing the company to manage the funds on their behalf, according to the lawsuit.
However, according to the lawsuit, Schwab manipulated this program to benefit its affiliated banks by setting low interest rates for customers and using the deposits to fund loans and investments that profited Schwab and its partners. The plaintiffs argue that Schwab’s actions were a breach of fiduciary duty, as the company prioritized its financial gains over the interests of its customers.
The lawsuit claims that in 2020, Schwab struck a deal with TD Bank and TD Bank USA to direct at least $50 billion of customer cash from the sweep program into accounts at these banks. This agreement was part of the consideration for Schwab’s acquisition of TD Ameritrade, which closed in October 2020.
The plaintiffs allege that Schwab used their cash to secure favorable terms for this acquisition, all while keeping the details of the agreement hidden from its customers. It wasn’t until 2024 that Schwab disclosed the existence of this deal, but even then, the company did not fully explain how the customers’ funds were used or the benefits TD Bank received from the arrangement, the lawsuit claims.
Schwab isn’t the only financial institution facing legal scrutiny over its cash sweep practices. Wells Fargo is currently dealing with a class action lawsuit alleging that it mismanaged customer cash deposits to generate billions in profits while paying minimal returns.
Similar accusations have been made against Ameriprise Financial, LPL Financial, and Morgan Stanley, with clients claiming that these firms enriched themselves at their customers’ expense. The SEC has also announced an investigation into Morgan Stanley for its handling of cash sweep programs.
The group of consumers suing Schwab want to represent customers nationwide in their claims of breach of fiduciary duty, gross negligence, unjust enrichment, and unfair or fraudulent business practices. They are seeking injunctive relief, damages, fees, and costs.
Case Details
Plaintiffs' Attorneys
Have you used Charles Schwab's cash sweep program or other cash sweep programs offered by financial institutions? Share your experiences and concerns in the comments below.
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