In a July 27, 2009, Order, a Southern District of New York judge dismissed a class action against five groups of banking entities engaged in allegedly engaged in “deceptive and misleading” practices relating to a series of “Cash Sweep Programs” that were offered as part of brokerage accounts. Cash Sweep Programs were features offered to retail investors by each of the five groups of banks including Merrill Lynch, Morgan Stanley, Citigroup, Charles Schwab and Wachovia. Through these programs, customers allegedly were offered the option of having the balance of uninvested funds in their brokerage accounts, i.e., “free credit balance,” placed in other types of investments. As a result, customers earned interest on uninvested funds in their brokerage accounts. The plaintiffs alleged that in the 1990’s that the defendants improperly modified the programs which resulted in lower rates being paid to the customer and which resulted in approximately $186 billion of customers’ free credit balances being deposited and becoming available for use by the defendants other commercial activities.
Among other things, the court found that plaintiffs failed to state a claim under the Investment Advisers Act of 1940 because “Plaintiffs’ allegations do not support the existence of an investment advisory relationship under the IAA as to any Defendant.” Further, the court found that “With respect to the Parent and Sweep Bank Defendants, Plaintiffs have not sufficiently alleged the existence of a fiduciary duty. Instead, Plaintiffs offer only the conclusory assertion that the ‘Defendants,’ collectively, ‘through their agents and representatives, held themselves out as financial advisors to Plaintiffs and other Class members, and as such owed fiduciary duties to Plaintiffs and the other Class members.’”
DeBlasio v. Merrill Lynch, et. al, Case No. 07 Civ. 318 (RJS) (S.D.N.Y.)