Finance brokerage firm looks to dodge claims it put customers' money into low-return cash sweep

SAN DIEGO (CN) — Independent broker-dealer LPL Financial argued Wednesday that its customers can’t claim the company unjustly enriched itself by automatically taking uninvested money in their accounts and depositing it into their cash sweep programs that paid little in interest because the business doesn’t have a fiduciary duty to clients.

“This free-floating fiduciary duty doesn’t supersede a contract,” said Joseph Floren of Morgan Lewis & Bockius, LPL Financial’s attorney, at a motion to dismiss hearing in San Diego federal Court. “It’s not reasonable to expect that LPL acted in the customer’s interests.”

The company, he added, “was entitled to every dollar it collected.”

In a class action filed last year, Michigander Daniel Peters said he opened simple accounts with LPL where his cash was automatically funneled into two different cash sweep programs. A cash sweep is a method used by investment firms to move uninvested cash into FDIC-insured accounts or money market funds.

Peters claims he and other customers received minimal interest payments from both LPL programs, while the company received substantial fees and returns on investments.

That scheme not only constitutes unjust enrichment by the company, unfair and fraudulent business practices but a violation of the company’s fiduciary duty to their customers to manage their accounts in the best interest of their customers. Peters argues.

“In fact, they got charged for the pleasure of making LPL some money,” said Michael Blatchley of Bernstein Litowitz Berger & Grossmann, Peters’ attorney.

Clients who had retirement accounts with the company who expected their money to earn interest were subjected to the same program, he added.

LPL argues that not only were the programs voluntary, but the company disclosed that interest rates customers received would be low because of fees paid to LPL.

The company says also disclosed with customers that the programs created a conflict of interest between it and customers because it relies on the fees it collects as an important stream of revenue and that without it, the company’s other fees would increase,

The company designed the program in its own interests, not the customers, Floren said and there’s no legal basis to argue that customers are entitled to interest payments.

U.S. District Judge Todd W. Robinson, a Donald Trump appointee, pointed out that the company’s contract with customers seemed to advise against entering into either program, but Blatchley argued that even then — and though they did advise disclose their conflict of interests — that doesn’t allow them to sidestep or disavow their fiduciary duty to customers.

The company’s disclosures about its fees “is not a model of clarity. What is clear is they said they were acting in the best interests of their clients,” Blatchley said.

Customers had to expressly opt out of the program, he added. The fees that the company collected were tens to hundreds of times greater than returns their clients got, Blatchley said.

“Given the language that appears in both the account agreement and the disclosure booklets, would it not be reasonable for an account holder to assume that as the banks paid more to LPL, that the interest rate paid to the account holder would similarly see an increase?” Robinson asked.

“The short answer is no,” Floren replied.

Robinson said he’d take LPL’s motion to dismiss the case under submission and issue a written order later.

The plaintiffs are asking the court to grant them damages, restitution, disgorgement of profits and forfeiture of compensation after a jury trial.