Wells Fargo faces new cash-grab class action lawsuit

A new class action lawsuit accuses Wells Fargo of underpaying customers interest on its cash advance program.

In a proposed class action lawsuit against the San Francisco-based lender, plaintiff Darren Cobb accuses Wells Fargo of breach of fiduciary duty, breach of fair dealing, breach of contract and unjust enrichment.

“Wells Fargo underpaid its customers, breaching its fiduciary and contractual duties to enrich itself at its customers’ expense,” according to the lawsuit filed Tuesday in the U.S. District Court for the Northern District of California. “Instead of paying its customers reasonable interest on their cash, as required, Wells Fargo instead paid its customers modest interest while it made hundreds of millions of dollars on that cash through rising interest rates.”

This lawsuit is a continuation of the previous one, filed last month by a Wells Fargo wealth management client.

Typically, under a cash sweep program, a brokerage firm moves a client’s uninvested funds from a brokerage account to an interest-earning account.

The complaint filed Tuesday accuses Wells Fargo of putting customers’ money into a cash sweep program and using the cash to generate “disproportionately large profits for itself” because of the difference between the interest it earns and the interest it pays to customers.

Wells Fargo paid cash-sweep account customers 0.15% interest through most of 2023, while the yield on short-term U.S. Treasury bills hovered around 5.25% for most of last year — a 36-fold difference, according to the lawsuit. The plaintiff further alleges that the lender pays account holders 0.02% interest on their cash sweep account balances.

The complaint alleges that Fidelity, a Wells competitor, transfers uninvested money from its customers’ brokerage accounts to a money market fund, earning about 5%.

A Wells Fargo spokesman declined to comment to Banking Dive.

The bank has faced regulatory scrutiny for underpaying interest on cash sweep accounts and other alleged abuses. Last fall, Wells Fargo disclosed that the Securities and Exchange Commission was reviewing the cash sweep options it offered to its advisory clients.

In July, the lender said on a financial-earnings conference call that it was raising rates on its cash sweep program, which is run by advisory clients. The change, which will reduce the bank’s profits by about $350 million annually, “will be more in line with rates paid on money-market funds,” the bank said.

Last month, Wells Fargo Quarterly Report disclosed details about the SEC investigation and said the regulator “conducted an investigation into the cash sweep option that the Company provides to investment advisory clients when opening an account.” The bank “is in the process of resolution discussions with the SEC, although the outcome of those discussions is uncertain,” the filing said.

Recent quarterly reports show Wells Fargo is one of several financial institutions that could face regulatory scrutiny over its cash advance programs. Morgan Stanley said it faces two putative class action lawsuits over cash sweep programs for its retail customers, adding that the bank is cooperating with the SEC in the matter. Broker-dealer LPL Financial admitted that a class action lawsuit was filed in July over its cash-paying policy. Bank of America also said it could face potential regulatory risks related to “interest rates paid on uninvested cash in investment advisory accounts that is transferred to interest-bearing bank deposits.”

The lawsuit, filed Tuesday, claims that the plaintiff and others suffered financial harm as a result of Wells Fargo’s alleged misconduct and that they are entitled to damages, including disgorgement and restitution of profits earned by the bank, pre-judgment interest on those amounts, attorneys’ fees, litigation costs and further punitive damages.