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Regulation and Compliance > Litigation

Schwab Asks Court to Dismiss Class-Action Suit Over Cash Sweeps

By Jeff Berman

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What You Need to Know

  • Schwab argues the case should be dismissed due to a lack of jurisdiction and failure to state a claim on the merits.
  • The main claim in the complaint is doomed to fail under federal securities laws, Schwab alleges.
  • The plaintiffs argued in their complaint that Schwab kept clients' SIP accounts overconcentrated in cash positions.

Charles Schwab is trying to get the class-action complaint that was filed against it in September by three investors over cash sweeps in its robo-advice service thrown out.

In a motion filed by Schwab in U.S. District Court for the Northern District of California in Oakland on Monday, the firm asked that the court dismiss the case “for lack of jurisdiction and, in the alternative, for failure to state a claim on the merits.”

John T. Jasnoch, an attorney with law firm Scott + Scott in San Diego who is representing the plaintiffs, did not immediately respond to a request for comment on Thursday.

The three investors who sued Schwab had alleged the firm violated its fiduciary duties by “wrongfully overconcentrating” clients’ Schwab Intelligent Portfolios robo-advisor accounts in cash positions that ended up costing them hundreds of millions of dollars.

In the complaint, filed on Sept. 10, Lauren Marie Barbiero, Kimberly Jo Lopez and William Kenneth Lopez alleged that Charles Schwab Investment Advisory, the subsidiary that manages the firm’s robo-advisor program, kept the plaintiffs’ and other clients’ Schwab Intelligent Portfolios accounts “overconcentrated in cash positions,” costing investors hundreds of millions of dollars and violating the firm’s fiduciary duties.

‘Doomed to Fail’

On Feb. 24, 2022, or as soon as the matter may be heard in the Oakland court, Schwab will move to dismiss the complaint, it said in Monday’s court filing.

The complaint “rests entirely on state-law claims that Congress forbade” in the Securities Litigation Uniform Standards Act, Schwab alleged. The plaintiffs “assert a classic securities claim: that [Schwab] misrepresented to SIP clients how it would invest their funds in certain nationally traded securities and instead caused Plaintiffs to be overly invested in cash deposits at an affiliated bank,” according to Schwab.

But “this claim is doomed to fail under the federal securities laws, as the features of SIP underlying Plaintiffs’ Complaint were fully disclosed to and approved by Plaintiffs, and indeed were widely known among the investing public,” Schwab alleged. “

So rather than litigate this claim under the standards and procedures prescribed by Congress, Plaintiffs have impermissibly repackaged it under state-law causes of action,” according to Schwab.

The plaintiffs also failed to state a claim upon which any relief can be granted, according to Schwab. According to the plaintiffs’ “own allegations, CSIA acted with their full knowledge and explicit consent,” Schwab said.

The Schwab division had used the plaintiffs’ questionnaires to propose investment portfolios specifying what percentage of their funds would be allocated to cash, stocks and other assets, according to Schwab. The plaintiffs then approved the portfolios, including the cash allocation they are now complaining about, before investing, Schwab alleged.

CSIA “clearly disclosed that the cash would be deposited at CSIA’s affiliated bank and that the bank would earn revenue from those deposits, which would allow the entities’ ultimate parent,” The Charles Schwab Corp. and its affiliates, to “offer SIP to clients without charging an advisory fee,” according to Schwab.

“CSIA’s disclosures — and Plaintiffs’ approvals — foreclose any claim that CSIA breached contractual or fiduciary duties, negligently misled clients, or violated the UCL,” Schwab added. “Thus, if this Court has jurisdiction, it should dismiss these claims with prejudice.”

(Pictured: Charles Schwab sign; Photographer: Christopher Dilts/Bloomberg)

Jeff Berman

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