Schwab Used Cash Sweep Funds to Purchase TD Ameritrade: Lawsuit

What You Need to Know

Schwab took for itself and its affiliates the vast majority of the compensation earned from its customers’ cash, the suit states.
The firm struck a deal to direct at least $50 billion to TD Bank through 2031, customers allege.
The suit argues that Schwab violated its fiduciary duty to its cash-sweep customers.

Charles Schwab is facing a class-action lawsuit alleging that the brokerage giant used “a substantial portion” of cash from its cash-sweep program to pay for the acquisition of TD Ameritrade, which closed in October 2020.

According to the lawsuit, filed Wednesday, Schwab used its cash-sweep program “to confer significant benefits upon itself and its affiliates by: (1) taking for itself and its affiliates the vast majority of the compensation earned from its customers’ cash at the expense of its customers and principals, who received only a minimal return on their cash deposits” and concealing the benefits Schwab received.

The lawsuit contends that Schwab “omitted critical disclosures regarding their contractual obligations vis-à-vis the Program to the non-affiliated Program Banks, TD Bank and TD Bank USA, pursuant to an agreement reached with TD Bank and TD Bank USA in 2020″ in connection with Schwab’s 2020 acquisition of TD Ameritrade Holding Corp. from TD Bank Group.

Schwab also failed “to adequately, if at all, disclose to its customers that it was an agent serving two masters — those being its customers on one hand, and its affiliated companies, including the Affiliated Banks, on the other hand,” the suit states.

Specifically, in 2020, unbeknownst to their customers, the suit states, Schwab — while acting as their customers’ agents with regard to the cash sweep program — entered into an agreement with TD Bank and TD Bank USA and “committed to direct and maintain a minimum amount at least $50 billion of cash swept from their customers’ accounts to TD Bank and TD Bank USA, in exchange for substantial benefits” to Schwab, through June 2031.