Customers Sue BD/IA for Breach of Fiduciary Duty

In a class action, a group of customers sued a broker-dealer/registered investment adviser alleging that it operated a cash sweep program that benefited itself and affiliates at the expense of the customers. 

In the Complaint, filed in the US District Court for the Central District of California, the plaintiffs argued that the cash sweep program was designed to benefit defendant and its affiliated banks, rather than the customers whose funds were swept into low-interest accounts. The plaintiffs argued that defendants operated the program in a manner that allowed it to set interest rates at its discretion and share in the financial gains from customers' cash deposits. According to the Complaint, the broker-dealer failed to disclose to customers that they were acting as agents for both the customers and its affiliated banks. The plaintiffs asserted that this conflict led the broker-dealer to favor its affiliates by negotiating one-sided transactions that shifted compensation and returns from customers' cash in the program to the affiliates. 

The plaintiffs claim breaches of fiduciary duty (including to act in the best interest of its customers), gross negligence, unjust enrichment and violations of California's Unfair Competition Law. The plaintiffs are seeking a permanent injunction to prevent the broker dealer from continuing these practices, as well as restitution, disgorgement of profits, actual and punitive damages and other relief deemed appropriate by the Court.