Wells Fargo, Merrill Lynch and Morgan Stanley are facing separate class-action complaints, accusing wire bureaus of generating “massive profits” at the expense of customers through their money-laundering programs.
The three lawsuits, which mirror similar class-action complaints filed against multiple firms in recent months, come after Wells Fargo revealed it lost $128 million in net interest income during the third quarter of 2024 as raised its deposit rates.
In a third-quarter earnings call Friday morning, Wells Fargo Chief Financial Officer Michael Santomassimo said the firm's net interest income fell $233 million (or 2%) between the second and third quarters. According to Santomassimo, $128 million of that decline was due to “price increases for liquidation deposits and advisory brokerage accounts and wealth and investment management.” Santomassimo also said that deposit rates and brokerage advisory accounts will continue to match the Fed's rate cuts. Wells' revenue at its wealth and investment management division rose 5% year-over-year due to higher asset-based fees driven by market valuations and transaction activity, despite falling revenue. net of interest from the increase in the general deposit rate (16% below annual for the division).
Meanwhile, Minneapolis-based Safron Capital Corporation filed separate lawsuits against Bank of America Merrill Lynch and Morgan Stanley, while Brickman Investments sued Wells Fargo. The complaints were brought in the Southern District of New York, with Robbins Geller Rudman & Dowd and Abraham Fruchter & Twersky listed as the plaintiff firms in all three suits.
In Wells Fargo's complaint (similar in content and language to the other two), the plaintiffs described how the firm would automatically delete qualified customers' uninvested cash balances in “interest-bearing” deposit accounts.
However, Wells faced a conflict of interest by profiting from the margin its affiliated banks earned on those deposits. According to the complaint, they were motivated to enroll customers in the sweepstakes programs even if those sweepstakes accounts paid customers lower interest rates. The plaintiffs alleged that the cleanup program's rates ranged from 0.02% to 0.2%, lower than many competitors' rates and the Fed's benchmark federal funds rate.
Last September, Wells Fargo disclosed that the SEC was investigating its clearing practices. In August, the firm revealed that it was in “resolution discussions” with the commission. The firm also announced at the end of the second quarter that it would raise prices for sweepstakes in advisory brokerage accounts, which they expected could lead to an annual revenue loss of $350 million.
In the lawsuit, the plaintiffs argued that Wells Fargo Advisors' conduct breached fiduciary duties, while it owed clients a comparable duty of care to retail clients through the SEC Regulation's best interest rule.
According to the complaint, Wells made misleading statements when it told customers that rates could be lower than rates for direct deposit customers. In reality, the clearing program's interest rates were always significantly lower than those of direct deposit customers (the complaint alleged that Wells Fargo changed its disclosure documents around the time it disclosed the SEC investigation to say that the clearing rates were “usually” lower).
In each lawsuit, the plaintiffs want class action complaints to represent customers affected by each firm's alleged conduct.
Wells FargoMorgan Stanley and others, including LPL, Raymond James, Ameriprise and UBS, are all named as defendants in previously filed class action complaints. Last Friday, a California federal judge ordered a class-action lawsuit filed in the state against Wells Fargo to be consolidated with several similar lawsuits also filed in recent months.
Bank of America Merrill Lynch disclosed in SEC filings that it may face legal and regulatory risks over its money laundering program. In August, Morgan Stanley revealed it faced its own SEC investigation into “advisory cash balances involved in affiliate bank deposit programs.”
Merrill Lynch declined to comment and Wells Fargo did not return a request for comment as of press time.
Morgan Stanley believed the allegations in the lawsuit were “baseless and clearly without merit,” according to a spokesman for the firm.
“The money laundering program is fully disclosed to customers, who accept it in connection with opening their account,” the spokesperson said. “The firm will vigorously defend itself against this and other claims.”