On June 14, 2024, a class action lawsuit was filed in the U.S. District Court for the Southern District of New York against Morgan Stanley alleging a breach of its fiduciary duty to customers and unjust enrichment by, among other things, offering interest rates on deposits in the banks in its Bank Deposit Program (the “Program”) lower than allegedly offered on deposit account investments by other firms. Through the Program, Morgan Stanley automatically deposits customer free credit balances into deposit accounts at two affiliated banks and, according to the Complaint, Citibank. The complaint is available through PACER.

The Complaint alleges that Morgan Stanley’s fiduciary duty arises from, inter alia, contract law and its regulatory obligations under the Securities and Exchange Commission’s Regulation Best Interest. Additional fiduciary obligations are alleged for Individual Retirement Accounts and securities accounts for which Morgan Stanley acts as an Investment Advisor under the Investment Adviser Act of 1940, as amended.

This suit follows several previous class actions making similar allegations about the interest rates paid on sweep program deposits.

• In 2019, as described in our previous client alert, a class action lawsuit against Merrill Lynch filed on August 27, 2019 alleges that sweep program disclosures provided to customers by Merrill Lynch were not valid and demands a “reasonable market rate” of interest as compensation and a declaration that the disclosures violate a 2005 New York Stock Exchange Information Memo and SEC Rule 15c3-3. Valelly v. Merrill Lynch, Pierce, Fenner & Smith Inc. remains pending in the U.S. District Court for the Southern District of New York following the filing of amended complaint.
• In 2023, the same law firm brought another class action against Merrill Lynch alleging that Merrill Edge had failed to pay a “reasonable rate of interest” on funds swept from retirement accounts. McCrary v. Merrill Lynch, Pierce, Fenner & Smith Inc. remains pending in the U.S. District Court for the Southern District of New York.
• In 2007, a class action suit brought against Merrill Lynch, Morgan Stanley and other securities firms in the U.S. District Court for the Southern District of New York making similar, though not identical, allegations concerning their bank sweep programs, was dismissed by the Court in 2009 based upon the disclosures made to customers concerning fees paid to the securities firms and the failure of the Plaintiffs to identify and actionable breach of fiduciary duty. See DeBlasio v. Merrill Lynch & Co., et al, 2009 U.S. Dist. LEXIS 64848 (S.D.N.Y. July 27, 2009).

Morgan Stanley must answer the complaint or file a motion to dismiss within 21 days of being served.