LPL Financial is facing a second lawsuit over its money laundering program.
Douglas Nevitt, a 66-year-old retired construction worker in Illinois, has filed a lawsuit in California federal court accusing the firm of breaching its responsibilities to customers. He is seeking class classification in his lawsuit.
According to Nevitt, who held an individual retirement advisory account with LPL from 2020 to 2022, the case centers on “a simple ruse,” arguing that LPL had a mandate to act only in the “best interests” of clients (due to the SEC's Reg BI Rule and advisers' fiduciary mandates) and to provide “reasonable interest rates” on client cash balances.
“Instead, (LPL) operates a scheme where the cash balances of these customers are used by (LPL) to generate massive profits for themselves based largely on prevailing market rates,” Nevitt argued.
The argument mainly reflects a group request in a lawsuit filed last week by Dan Peters, an LPL customer in Michigan. In his lawsuit, Peters argued that LPL's money laundering program evolved over the years “into an aggressive and illegal effort” that always increased LPL's profits at the expense of customers. Peters argued that the firm always structured its write-off programs to ensure that it received the largest share of interest in cash holdings.
LPL (like many other institutions) has established a cash clearing program, which will automatically transfer (or delete) remaining cash balances to the client's eligible cash (including proceeds from securities transactions, deposits in cash and other money) in “interest-bearing deposit accounts”. .”
However, Nevitt argued that LPL consistently failed to provide reasonable interest rates to customers and the rates offered by the firm were significantly lower than those of competitors.
In the complaint, Nevitt compared LPL's interest rate on sweepstakes programs to Vanguard's and InteractiveBrokers' rates; for customers with a cash balance between $150,000 and $299,999, for example, LPL rates were 0.40%, compared with 4.6% at Vanguard and 4.83% at InteractiveBrokers.
While some firms operate money market funds (with relatively higher rates of return) as destinations for excess client cash, Nevitt argued in his complaint that LPL discontinued their use as “a money laundering option ” in April 2019.
But the LPL hasn't suffered, according to Nevitt; in the complaint, he argues that from March 2022 (when interest rates set by the Fed began to rise) to now, the difference between what LPL paid customers and what it made in the market increased 107%.
“Thus, LPL has a substantial financial interest in (1) not paying its customers a reasonable interest rate and keeping as much spread as possible, and at the same time (2) not disclose to its customers the unreasonable interest rates paid by the company (as well as the company's inherent conflicts of interest), so that customers would not pursue accounts with more lucrative rates at other institutions,” the complaint said.
LPL did not comment directly on the lawsuit, although a spokesman said, “our FDIC-insured cash-clearing vehicles prioritize safety, liquidity and yield — in that order” and that it is “primarily designed to hold short-term cash.”
LPL is not the only company facing customer lawsuits over its money laundering programs. Late last month, Wells Fargo was a defendant in a lawsuit alleging the firms breached their obligations to customers by improperly structuring clearing programs (Ameriprise is also facing a similar complaint, according to Barron's).
Keith Bujold is the New Mexico-based plaintiff in the Wells Fargo lawsuit filed in the Northern District of California. He claimed to have been a client of Wells Fargo Advisors since 2014, having put money into low-interest bank accounts when Wells Fargo investments returned much higher than he was paid.
“While claiming to have designed, implemented and operated the Bank Sweep Programs as an agent of its clients, in reality, WFA used the Bank Sweep Programs to generate large fees for itself at the expense of its clients who receive only a minimal return on their money. deposits, while WFA keeps for itself the vast majority of interest and fees that program banks paid on money deposited by WFA customers at those banks,” the complaint said.
Bujold noted that Wells Fargo has canceled its money laundering programs after discovering in late 2023 that the SEC was investigating them. Last month, during its second-quarter earnings call, Wells Fargo revealed it would change the pricing of its money laundering programs and raise the interest rate for customers; was estimated to cost Wells Fargo about $350 million a year, which Bujold said was “proof of the massive payoff” the program was for the firm.
Wells Fargo declined to comment.
According to CEO Dan Arnold, LPL is continuing to remain committed to its money laundering pricing. During the firm's second-quarter earnings call, Arnold said LPL had “no plans” to make changes, alluding to firms such as Wells Fargo, Bank of America and Morgan Stanley, which all announced anticipated price changes. .
“As for the firms that have made changes, they have different business models and monetization frameworks than ours, so we can only speculate about the issues they might address,” Arnold said.