Robinhood Class Action: Cash Sweep Program Exploits Customers

Case Overview: A class action lawsuit claims Robinhood's cash sweep program prioritizes the company's profits over its customers' financial well-being by offering unreasonably low interest rates.

Consumers Affected: Robinhood customers enrolled in the Deposit Sweep Program.

Court: U.S. District Court for the Northern District of California, San Francisco Division

Robinhood is under fire in a class action lawsuit alleging it used its Deposit Sweep Program to benefit itself at the expense of its customers. Plaintiffs claim the financial services company offered unreasonably low interest rates on uninvested cash while profiting significantly from the program.

The lawsuit accuses Robinhood of failing to act in its customers’ best interest, violating its fiduciary duties, and unlawfully retaining most of the returns generated by the cash it managed through partner banks.

Robinhood Customers Allege Unfair Practices in Cash Sweep Program

Basudeb Dey, a Robinhood customer from Oakland, California, filed the proposed class action lawsuit. According to the lawsuit, Dey has been enrolled in Robinhood’s Deposit Sweep Program since 2018. Through this program, Robinhood automatically transferred uninvested cash from his brokerage account into interest-bearing deposit accounts at partner banks.

Dey alleges that Robinhood has been paying him a paltry interest rate of 0.01% on his cash balances, even as other financial institutions offer rates hundreds of times higher.

“The scheme is devised to maximize profits for Robinhood while at the same time disregarding its clients’ best interest,” the lawsuit states. The plaintiffs argue this practice violates Robinhood’s obligation to prioritize its customers’ financial well-being.

Low Interest Rates Benefit Robinhood, Not Consumers, Lawsuit Claims

The Deposit Sweep Program is marketed as a way to provide customers with FDIC insurance and interest on uninvested cash. However, Dey alleges it primarily serves as a revenue stream for Robinhood, which earned $120 million from the program in 2023 alone, according to the lawsuit.

Under the program, Robinhood transfers customers’ uninvested cash into accounts at partner banks, ostensibly to ensure the money is insured and earns interest. Customers rely on Robinhood to negotiate interest rates with these banks, but the lawsuit claims Robinhood has prioritized its own financial gains by securing unreasonably low rates for customers.

The lawsuit highlights the significant gap between Robinhood’s interest rates and the market average, noting that competing financial institutions offer rates more than 450 times higher.

Other Financial Institutions Face Similar Allegations Over Cash Sweep Programs

Robinhood isn’t alone in facing allegations over cash sweep programs. Several major financial institutions, including Charles Schwab, Wells Fargo, and Morgan Stanley, have recently been hit with similar lawsuits.

Charles Schwab is accused of misusing funds from its cash sweep program to finance its acquisition of TD Ameritrade, while Wells Fargo is facing claims that it mismanaged customer deposits to generate billions in profits.

In addition to these lawsuits, the SEC has launched an investigation into Morgan Stanley’s handling of its cash sweep programs, further highlighting growing concerns about the transparency and fairness of such practices across the industry.

In the Robinhood cash sweeps class action lawsuit, Dey wants to represent Robinhood customers nationwide who had cash deposits in one or more Program Banks with Robinhood’s Robinhood’s Deposit Sweep Program. He is alleging breach of fiduciary duty, gross negligence, breach of the implied covenant of good faith and fair dealing, negligent misrepresentations and omissions, and violation of the California Unfair Competition Law, and is seeking damages, injunctive relief, enjoinment, interest, costs, and fees.

Case Details

• Lawsuit: Dey v. Robinhood Markets, Inc., et al.
• Case Number: 4:24-cv-07442-KAW
• Court: U.S. District Court for the Northern District of California, San Francisco Division

Plaintiffs' Attorneys

• Jennifer L. Joost, Ethan J. Barlieb, and Joseph H. Meltzer (Kessler Topaz Meltzer & Check, LLP)
• James E. Cecchi, Michael A. Innes, Kevin G. Cooper, Grant Y. Lee, Zachary Jacobs, and Jason H. Alperstein (Carella, Byrne, Cecchi, Olstein, Brody & Agnello, P.C.)

Are you a Robinhood customer enrolled in the Deposit Sweep Program? Share your thoughts on this lawsuit in the comments below.