JPMorgan Is Latest to Be Sued Over Cash Sweeps

JPMorgan Chase and JP Morgan Securities were hit with a consumer class action Nov. 4 for "exploitative and unfair implementation" of the firms' Bank Deposit Sweep Program.

While acting as an agent and fiduciary to its customers, JP Morgan Securities "sweeps" uninvested cash balances in its customers' accounts and deposits that cash into accounts located at its affiliated bank, JPMorgan Chase Bank.

Because the bank's accounts "pay far below market rates of interest, Plaintiff and other Class members have lost significant amounts of interest they would have otherwise earned had JP Morgan Securities swept their uninvested cash into bank accounts that pay a market interest rate," according to the suit, filed in U.S. District Court for the Central District of California.

The result is a breach of defendants' fiduciary duties, the plaintiff argues.

The lawsuit was brought by Jamie Canales, a customer of JP Morgan Securities, who maintained a Roth IRA in a self-directed investing account with the firm in which cash was held over the life of the account. That cash was automatically "swept" into a low-interest Chase account.

Canales was enrolled automatically in the cash sweep program, "and so for years his uninvested cash has been automatically swept into the affiliated banks that JP Morgan Securities selected in its discretion, at rates as low as 0.01%," the suit states.

JP Morgan Securities "breached its fiduciary duties when it placed its customers' cash in low interest-bearing accounts held by its own affiliates and then pocketed the unpaid interest as additional profit," the suit states.

"Worse, JP Morgan Securities failed to adequately disclose to its customers that, as to the Program, it was essentially providing a kickback to its own affiliates at its customers' expense," the suit continues.

"Specifically, Defendants shortchanged their customers for their and their affiliates' benefit by negotiating with the Bank onesided transactions that swept cash into exceedingly low-interest accounts," the suit states. "JP Morgan Securities failed to disclose and discuss these conflicted transactions, much less obtain informed consent from its customers and principals."

As interest rates have surged, a wave of lawsuits has accused brokerages of automatically transferring customers' uninvested funds into interest-bearing cash sweep accounts without adequately disclosing that most of the funds are transferred to affiliate banks with minimal returns to accountholders.

Credit: AP