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A number of major brokerage houses are facing proposed class actions for sweeping uninvested brokerage account money into low-interest accounts at affiliated banks and using the funds to earn money for the companies. The brokerage firms allegedly earned money by collecting more in interest or loan payments than they paid in interest to the sweep-account holders. The so-called “sweep suits” have been filed in federal court in New York and Colorado. Sweeping has become a huge source of revenue for brokerage firms, but it’s not defendable, said Joel Paul Laitman of New York-based Schoengold Sporn Laitman & Lometti, a plaintiffs’ lawyer on both New York cases. “This is simply adverse to what any bona fide financial adviser would do,” Laitman said. Laitman’s New York cases include claims of violation of the Investment Advisers Act of 1940, the New York general business law and various fraud, breach and negligence claims. A case against 21 defendants, including Merrill Lynch & Co. Inc., Morgan Stanley & Co. Inc., Citigroup Inc., The Charles Schwab Corp., Wachovia Securities and affiliate companies and banks, accuses the companies of running cash-sweep programs that yielded them 8% interest while paying customers 1% or less. DeBlasio v. Merrill Lynch & Co., No. 07-318 (S.D.N.Y.). Answering back Answers are due on Oct. 29 and the omnibus motion to dismiss is due on Nov. 12. Defense lawyers at Sidley Austin and LeClairRyan of Richmond, Va., and most companies did not respond. Morgan Stanley said it will vigorously contest the case and Merrill Lynch spokesman Mark Herr said the company uses “plain language” to give customers “clear and full disclosures” of the cash-sweep programs. TD Ameritrade Holding Corp. and affiliate companies have yet to file an answer in a similar case. Welch v. TD Ameritrade Holding Corp., No. 07-6904 (S.D.N.Y.). The Colorado case notes a sizable interest-rate gap between UBS Financial Services Inc.’s money-market accounts, which earned more than 4% during the relevant time period, and rates for uninvested brokerage money, which started at 1.1%. The claims in the case are breach of fiduciary duty and breach of the implied covenant of good faith and fair dealing. Straily v. UBS Financial Services Inc., No. 07-884 (D. Colo.). Plaintiffs’ lawyer Robert W. Biederman of Dallas-based Hubbard & Biederman said his client had originally invested with Paine Webber and became a UBS customer when the two companies merged in 2000. UBS changed its sweep account policies after establishing an affiliate bank in 2003, and his client eventually noticed the interest rate differentials, Biederman said. “Our position is: They can’t [just] make any change under the sun, they must do it with the customer’s interest in mind,” Biederman said. “The fact that the contract permits changes to be made doesn’t give them the absolute right to direct the money to themselves and offer a low interest rate.” UBS lawyers at Chicago’s Kirkland & Ellis and Denver-based Holland & Hart did not return calls for comment, but the lawyers’ motion to dismiss argued that the sweeping activity is a contractual issue governed by the customer agreement, which limits their fiduciary duties under New York law. Some discovery was stayed in September while the judge considers a UBS motion to dismiss. A trial is scheduled for July 2008. New York securities lawyer Loren Schechter, who heads the broker-dealer practice of Philadelphia-based Duane Morris, said the brokerages’ liability is likely to hinge on language in their customer agreements. “I think it’s going to be disclosure issues case by case,” Schechter said.

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