By Jonathan Stempel
NEW YORK, June 15 (Reuters) - Wachovia Corp. WB.N, which agreed last month to buy A.G. Edwards Inc. (AGE.N) for $6.8 billion, has been added to a federal lawsuit accusing large U.S. brokerages of moving customers’ idle cash into low-yielding accounts to boost profits.
The lawsuit, which seeks class-action status, says Wachovia, Citigroup Inc. (C.N), Merrill Lynch & Co. MER.N, Morgan Stanley (MS.N) and Charles Schwab Corp. SCHW.O automatically sweep cash into bank accounts that pay low rates, rather than money market or savings accounts yielding 4 percent to 5 percent.
It said these policies cover about $186 billion of client cash, and typically penalize customers with less than $250,000 or $500,000 in their accounts the most. At Wachovia, clients need at least $5 million to get the top sweep rate, the complaint said.
“Defendants were able to use their clients’ uninvested cash for their own profit, achieving yields of 8 percent and higher, while paying their clients as little as less than 1 percent,” the complaint said. “(They) falsely and deceptively asserted that through the cash sweep programs, defendants were acting in their clients’ interest in making client cash work hard for the client.”
The lawsuit was filed in January in the U.S. District Court in Manhattan. Charlotte, North Carolina-based Wachovia, the fourth-largest U.S. bank, was added as a defendant this week. The named plaintiffs include six brokerage customers in New York and one in North Carolina. They are seeking compensatory and punitive damages, and to void the brokerages’ sweep programs.
Wachovia spokesman Tony Mattera and Citigroup spokeswoman Shannon Bell declined to discuss the lawsuit. Morgan Stanley spokesman James Wiggins said the lawsuit lacked merit, and that his brokerage’s disclosures were “fair and comprehensive.” The other defendants did not immediately return calls for comment.
Margins for banks and brokerages have been under pressure for the last year-and-a-half because short-term Treasury rates were at or above long-term rates. Lenders dislike this because it boosts their borrowing costs and deposit payouts. The Treasury “yield curve” resumed a more normal shape last week.
On a May 31 conference call, Wachovia said it planned to move some A.G. Edwards money fund assets to an in-house product, calling it “additive to our results.” Mattera said Wachovia has not decided which accounts it will offer A.G. Edwards customers.
The purchase of A.G. Edwards would give Wachovia about 14,784 brokers, making it the second-largest publicly traded U.S. retail brokerage, behind Merrill. Wachovia expects a fourth-quarter closing.
Shares of Wachovia rose 53 cents to $54.15 in morning trading on the New York Stock Exchange.
((Reporting by Jonathan Stempel, Reuters Messaging: email@example.com, 646 223 6317; editing by Deborah Cohen)) Keywords: WACHOVIA LAWSUIT/
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