Schwab Used Cash Sweep Funds in TD Ameritrade Deal: Lawsuit

News August 30, 2024 at 12:59 PM
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What You Need To Know

  • Schwab took for itself and its affiliates the vast majority of the compensation earned from its customers' cash, the suit states.
  • The firm struck a deal to direct at least $50 billion to TD Bank through 2031, customers allege.
  • The suit argues that Schwab violated its fiduciary duty to its cash-sweep customers.
Charles Schwab Building in NY

Charles Schwab is facing a class-action lawsuit alleging that the brokerage giant used "a substantial portion" of cash from its cash-sweep program to pay for the acquisition of TD Ameritrade, which closed in October 2020.

The lawsuit was filed Wednesday in the U.S. District Court for the Central District of California by three Schwab customers, Mary Loughran, Rosemary Orlando, and Edward Carr. The plaintiffs say Schwab used its cash-sweep program "to confer significant benefits upon itself and its affiliates by: (1) taking for itself and its affiliates the vast majority of the compensation earned from its customers' cash at the expense of its customers and principals, who received only a minimal return on their cash deposits" and concealing the benefits Schwab received.

The lawsuit contends that Schwab "omitted critical disclosures regarding their contractual obligations vis-à-vis the Program to the non-affiliated Program Banks, TD Bank and TD Bank USA, pursuant to an agreement reached with TD Bank and TD Bank USA in 2020″ in connection with Schwab's 2020 acquisition of TD Ameritrade Holding Corp. from TD Bank Group.

Schwab also failed "to adequately, if at all, disclose to its customers that it was an agent serving two masters — those being its customers on one hand, and its affiliated companies, including the Affiliated Banks, on the other hand," the suit states.

Specifically, in 2020, unbeknownst to their customers, the suit states, Schwab — while acting as their customers' agents with regard to the cash sweep program — entered into an agreement with TD Bank and TD Bank USA and "committed to direct and maintain a minimum amount at least $50 billion of cash swept from their customers' accounts to TD Bank and TD Bank USA, in exchange for substantial benefits" to Schwab, through June 2031.

The substantial financial benefits conferred to TD Bank Group pursuant to this agreement involving Schwab's customers' cash "were part of the consideration that Defendants agreed to pay for their acquisition of TD Ameritrade Holding Corporation from TD Bank Group," according to the suit.

Unbeknownst to their fiduciary customers, Schwab "used a substantial portion of their customers' cash to help pay the price of Defendants' acquisition of TD Ameritrade Holding Corporation, in breach of their fiduciary duties," the suit maintains.

Schwab only disclosed to their cash-sweep customers "for the first time the existence of their agreement with TD Bank and TD Bank USA in the 2024″ cash-sweep agreement, the suit continues, "but even then they failed to disclose to their fiduciary clients the reason for the agreement, the amount of the benefits conferred to TD Bank and TD Bank USA pursuant to the agreement, and the fact that Defendants used their fiduciary customers' money for Defendants' own benefit."

Schwab said in a statement Friday: "Allegations aren't facts, as is the case with this legally unsound, copycat lawsuit. When clients choose a self-directed approach, they have full control over their assets and cash management decisions. That means they have access to a wide range of cash solutions and information to help them choose the solutions that best fit their individual needs. Our offerings provide safety and liquidity to meet everyday cash needs, and our clients value the option of FDIC insurance protection combined with convenient access to their cash."

Credit: Bloomberg

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