By Andrew Welsch
In a partial legal win for LPL Financial, a federal judge dismissed parts of an investor lawsuit against the company over the paltry rates it paid clients on uninvested cash.
On June 30, Judge Todd W. Robinson dismissed investor claims of breach of contract and breach of fiduciary duty, writing that the plaintiffs failed to "identify a contractual term that required LPL to act in their 'best interest' when enrolling clients in its cash sweep programs."
However, the judge will allow the plaintiffs an opportunity to amend their original complaint to address what he viewed as deficiencies with regard to their initial claims. He also allowed investor claims of unjust enrichment and breach of implied covenant to proceed.
Investors Daniel Peters, Douglas K. Nevitt, and Carol White, had filed their lawsuit in a federal court in San Diego and were seeking class action status. It was one of many investor lawsuits filed against brokerage firms, generally accusing the firms of breach of fiduciary duty with regard to cash sweep programs that have become very profitable for brokerage firms, but less so for their customers because of the low rates paid on cash.
A representative for LPL declined to comment on the case. Lawyers for the investors didn't respond to a request for comment.
LPL is one of the nation's largest wealth management companies with roughly 30,000 advisors and $1.8 trillion in assets. Because LPL doesn't operate a bank, its cash sweep program differs somewhat from other wealth management companies in that it moves investors' idle dollars to bank accounts at partner banks. These accounts are FDIC insured and not intended as long-term investment options, according to the company. LPL keeps the lion's share of the interest paid on the accounts, passing on a small amount to customers.
For example, when Peters opened his account in August 2022, LPL offered customers an interest rate of 0.34% for all deposit balances of less than $300,000 and the company received a rate of 2.91%, according to court documents.
The plaintiffs said LPL's "drastic underpayment" spurred their lawsuit, according to their Dec. 12 amended complaint filed in a federal court in San Diego. "While expressly acting as its clients' agent with respect to those programs, LPL violated its fiduciary, contractual and implied duties by underpaying its clients to enrich itself at its clients' expense," the complaint says. "Rather than pay its clients a fair and reasonable interest rate on their cash balances and put its clients' interests above its own, LPL instead paid de minimis rates to its clients, unjustly obtaining for itself billions of dollars on that cash during periods of rising interest rates."
LPL denied the allegations, saying the investors were attempting to "retroactively force" it to pay more in interest to investors and to impose duties which LPL didn't have, according to the company's Jan. 13 court filing. The company said that it properly disclosed interest rates and its conflicts of interest to investors.
"Moreover, LPL told plaintiffs that it set its overall advisory fees with the expectation that this 'important revenue stream' will continue, and that without it LPL's other fees 'would be higher,'" the company said.
After reviewing LPL's disclosures, Judge Robinson found that the plaintiffs failed to identify any contractual term in which LPL promised to mitigate its conflicts of interest with respect to the cash sweep programs. He also found that LPL agreed only to pay the rates disclosed in its underlying contracts. "Because plaintiffs fail to identify any contractual provision requiring LPL to pay a 'reasonable' amount of interest to the clients participating in the cash sweep programs, their breach of contract claim fails as to that theory," he wrote.
In a March 13 filing, LPL said that although the plaintiffs argue LPL owes them a fiduciary duty with respect to advisory accounts, that didn't extend to details of the cash sweep program. Judge Robinson said he agreed, finding that LPL didn't have a fiduciary duty with regard to the cash sweep program. In addition, neither the Investment Advisers Act nor Regulation Best Interest (an SEC rule) provides investors with a right to sue in court or even apply to the cash sweep programs, he wrote.
Siding with the investors. In a win for the plaintiffs, the judge found that they "plausibly allege that LPL breached the implied covenant of good faith and fair dealing" because investors could have reasonably expected the interest paid to them would increase as market conditions changed and interest rates generally rose.
The judge said that a reasonable individual entering the cash sweep program at the same time as Peters could have expected that either LPL would continue collecting its 2.91% fee or would continue paying clients approximately 10% of the amount banks are willing to pay. "Instead, when these proceedings were initiated in 2024, LPL's interest rate dropped to 0.20% for all deposit balances of less than $300,000, while LPL increased its fee to 3.32%," the judge said.
Finally, the judge concluded that there existed "some ambiguity" in the account agreement and related documents with regard to how interest and fees on sweep cash were to be calculated. He therefore denied LPL's request to dismiss clients' claims of unjust enrichment.
The plaintiffs have a choice of either proceeding with their remaining claims or filing an amended complaint.
Write to Andrew Welsch at andrew.welsch@barrons.com
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July 10, 2025 14:30 ET (18:30 GMT)
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