Charles Schwab now enters a lawsuit for cheating its customers after investors accused the bank giant of breaching its fiduciary duty.
Three investors have filed a lawsuit against Charles Schwab, alleging that the firm has breached its fiduciary duty by designing its cash-sweep program to primarily benefit itself at the expense of its clients.
The lawsuit, submitted last week in a federal court in Los Angeles, identifies Mary Loughran, Rosemary Orlando, and Edward Carr as plaintiffs.
They are seeking class-action status for themselves and other Schwab clients impacted by the company’s practices.
This case adds to a growing trend of lawsuits against major wealth management firms concerning cash-sweep accounts.
Clients of Morgan Stanley, Wells Fargo, LPL Financial, and Ameriprise Financial have also taken legal action recently.
Schwab’s cash-sweep program involves transferring uninvested client cash into bank accounts that are FDIC insured but yield minimal interest.
While Schwab is known for its brokerage services, a significant portion of its revenue comes from net interest margins—the difference between the interest earned on assets and the lower interest paid on funding sources.
Clients’ uninvested cash plays a crucial role in funding these interest-earning assets.
The investors assert that Schwab has significant control over its cash-sweep program and has intentionally structured it to offer “unreasonably low interest rates.”
The lawsuit claims that this program enables Schwab to direct customer deposits to its affiliated banks, boosting the firm’s profits at the direct cost of its clients.
The lawsuit states, “By designing, implementing, and operating this program to enrich itself at the cost of its customers, Schwab has breached its fiduciary duty.”
Additionally, the plaintiffs accuse Schwab of failing to properly disclose details regarding its 2020 acquisition of TD Ameritrade, particularly an agreement with TD Bank.
They claim Schwab agreed to maintain at least $50 billion in cash-sweep deposits at TD Bank as part of the acquisition but did not sufficiently inform clients about the rationale for this agreement or the financial benefits it provided to TD Bank.
In response, Schwab has denied the allegations, stating the lawsuit is “without legal merit.”
A spokesperson for the company said, “When clients choose a self-directed approach, they retain full control over their assets and cash management decisions.”
They emphasized that clients have access to various cash solutions and detailed information to make informed choices and noted that the cash offerings prioritize safety and liquidity.
The investors are seeking class-action status, monetary damages, and other remedies as determined by the court.
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Other Banking News Today
Citibank now fires a whistleblower for ‘underperformance’, after the former employee provided records requested by the OCC.
Citi has filed a countersuit against its former employee, Kathleen Martin, alleging that she was terminated not for refusing to falsify records for the Office of the Comptroller of the Currency (OCC), as she claimed in her lawsuit from May, but rather for being unable to properly fulfill the duties of her role.
Martin, who was let go from her position as Citi’s interim data transformation chair in September 2023 after nearly two years with the bank, had alleged in her lawsuit that she was fired for not agreeing to Chief Operating Officer Anand Selva’s request to conceal information from the OCC that would make the lender “look bad.”
In a revised lawsuit, Kathleen Martin has accused Citi’s Chief Operating Officer Anand Selva of intentionally deceiving the bank by wanting to misrepresent Citi’s compliance metrics to the Office of the Comptroller of the Currency (OCC).
Martin claims Selva sought to conceal information from the OCC that would have made the bank “look bad.”
However, Citi maintains that Martin’s termination in September 2023 was not due to her refusal to falsify records, but rather because she lacked the necessary “leadership and engagement skills” to effectively execute the role of interim Data Transformation Chair, which she had been appointed to after the previous chair, Rob Casper, departed the company.
Citi asserts that during Martin’s interviews and assessment for the interim role, it was identified that she needed to improve in areas like her “dogmatic nature, lack of innovation and lack of experience driving the execution of complex change across Citi.”
Once Casper left, Citi’s senior leadership, including COO Selva, determined that Martin could not successfully fulfill the demands of the interim chair position.
According to Citi, COO Anand Selva tried to help the plaintiff, Kathleen Martin, improve her performance in the interim Data Transformation Chair role.
Selva allegedly set up one-on-one meetings and working groups to facilitate better collaboration and working relationships with stakeholders.
Selva’s HR team also provided Martin with a senior mentor to support her development.
In May 2023, Citi leadership discussed a plan to improve Martin’s performance.
In July, Selva conveyed Martin’s mid-year review before she raised any concerns about his behavior.
Soon after, Martin contacted HR and expressed fears about her job security.
Citi claims that Martin “felt her position was at risk,” but the bank asserts that internal documents showed she “exceeded expectations” and that CEO Jane Fraser had commended her for her “gravitas” and ability to build “strong relationships” at the bank.
However, Citi says Martin failed to heed the feedback provided, and she was ultimately removed from the Data Transformation Chair role because she lacked the “executive level relationships” and leadership needed to successfully execute the data transformation efforts.
Citi says the data transformation work was too critical for the bank to tolerate Martin’s underperformance.
Citi denies Martin’s claims that she protested the reporting of a key metric accurately or that Selva objected to it.
The bank says Selva and Martin met in September 2023 to discuss reporting certain metrics using red, amber, and green scales.
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