Lawsuits Renew Scrutiny of Big Banks’ Deceptive Practices on Cash Sweep Accounts

Following a steady stream of accusations that big banks like JPMorgan Chase and Wells Fargo have deceived and cheated investors for years, recent lawsuits are shining a light on how banks secretly manage – or mismanage – so-called cash sweep accounts.

Brokerage firms park customers’ uninvested funds in cash sweep accounts. Theoretically, the funds are automatically transferred to a higher-interest savings account or other investment vehicle. But several class-action lawsuits filed recently in U.S. district courts allege that banks and their broker affiliates are generating substantial revenues from the idle cash while only a small percentage goes to their clients.

The plaintiffs accuse the defendants, including Wall Street heavyweights Raymond James, JPMorgan, Schwab and UBS, of paying customers based on extremely low interest rates and raking in significant profits off the difference of what they earn from the cash sweep accounts. The banks allegedly hide this activity from clients and have failed to adequately explain the fine print of their cash sweep account management, according to the lawsuits.

The latest flurry of litigation follows a series of class-action cases against Ameriprise Financial, LPL Financial, Wells Fargo and Morgan Stanley regarding their cash sweep programs. The Securities and Exchange Commission is also reportedly investigating whether Morgan Stanley, Wells Fargo and other financial services firms have run afoul of federal securities laws in the management of these accounts.

Despite the renewed scrutiny of big banks and their alleged shifty tactics related to cash sweep accounts, the question remains: Will these financial powerhouses ever face real consequences? Commentary from almost a decade ago suggests they won’t. Offering up a laundry list of alleged malfeasance, a piece in The New York Times published in 2015 snarked that settlements by big Wall Street banks had “underscored their astonishing ability” to persuade government officials to allow them to “escape without any real penalty for wrongdoing.” The Times continued:

“Knowingly assemble shaky mortgages into securities and then market them as safe investments? No problem. Rig the price of foreign currencies? Of course. Manipulate the price of gold, silver, copper and oil? Go ahead. Conspire to set the price of the London interbank borrowing rate, or Libor, to the detriment of tens of millions of corporate and individual borrowers the world over? Sure, especially when the only penalty before getting back to business as usual is a fine paid with shareholders’ money.”

Complaints about cash sweep accounts go back even farther than that, though. Charles Schwab and Citigroup Inc. were among the banks alleged in 2009 to have abused the accounts. Nevertheless, the likes of Morgan Stanley, Deutsche Bank and BlackRock continue to enjoy status as “well-known seasoned issuers.” That gives them instant access to investors in the capital markets.

Anger stemming from the perceived special treatment of banks prompted one SEC commissioner in 2015 to mount a campaign to hold them accountable. The commissioner, Kara M. Stein, raised a ruckus over the SEC issuing waivers that enabled bad actors to remain well-known seasoned issuers. We’ll find out if the latest developments bring out the righteous indignation in the latest crop of leaders at the commission.