The class action suit filed against Charles Schwab, a financial advisory firm, includes investors who have held an Intelligent Portfolios account for at least four years. Among the claims is a breach of contract, unjust enrichment, negligent misrepresentation, and unfair business practices. The lawsuit was triggered by Schwab’s $200 million disclosure in July. It also mentions an investigation by the SEC. Here is more information on the lawsuit.
Charles Schwab Intelligent Portfolios
This class action lawsuit against Charles Schwab outlines how the company violated state securities laws by charging undeclared fees to retail investors. The class of investors includes those who opened an Intelligent Portfolios account before Sept. 10, 2021, and up until the case is tried. Among the claims are breaches of fiduciary duty, negligent misrepresentation, unfair business practices, and breach of contract. In addition, the plaintiffs allege that Schwab overreached its clients by making their accounts more conservative than they needed to.
Upon investigating the allegations, Charles Schwab has settled with the SEC for nearly $200 million. The settlement stipulates that the firm will hire an independent consultant to evaluate its Robo-advisor disclosures, advertising and marketing, and complaint procedures. As part of its settlement, the company will also pay the $187 million to settle the lawsuit. Its Robo-advisor, Schwab Intelligent Portfolios, improperly allocated money from client accounts to cash investments, knowing that such actions would not make the clients more money.
Cash sweeps
The White Law Group is investigating claims by Schwab Intelligent Portfolios customers, alleging that Charles Schwab Investment Advisory over-allocated cash in their accounts. The cash was deposited into Charles Schwab Bank, where it purportedly earned interest of 0.01%. This behavior caused the customers to suffer more than half a billion dollars in losses. But did Schwab do this? Is the money owed to them due to their self-dealing behavior?
The SEC alleged that three Schwab Intelligent Portfolios units, as part of the SIP program, swept hundreds of millions of dollars from their clients to an affiliate bank, where it lent it out and kept the interest difference. Essentially, Schwab hid this fact by making their clients believe that the cash sweeps were a legitimate investment strategy and did not violate any laws. In response to the allegations, the three units agreed to pay a total of $187 million to settle the lawsuit.
SEC investigation
The SEC is investigating the case because the company made misleading statements in its filings. According to the SEC’s complaint, Charles Schwab’s investment adviser subsidiaries set cash allocations that were less profitable for their clients. While the company claimed that these allocations were determined using a ‘disciplined portfolio construction methodology,’ the reality is that they were predetermined for business reasons. In addition, Charles Schwab did not charge an advisory fee.
The company disclosed a $200 million accounting charge for the company’s second quarter of fiscal 2021, but the SEC has not publicly stated the results of its investigation. A Schwab spokeswoman declined to comment on the case. She said that she would not comment on the lawsuit. However, she noted that the company was “considering a lawsuit.”
Settlement
After an SEC investigation, Charles Schwab has agreed to pay nearly $200 million in a settlement relating to its Intelligent Portfolios Robo-advisor service. The SEC found that the Robo-advisor steered clients’ investments in suboptimal directions and failed to warn them about the hefty fees it tacked on. In addition, the Robo-advisor allocated some client assets to cash investments, knowing that they would make less money. The company loaned the extra cash to an affiliate bank.
As part of the settlement, Charles Schwab must pay disgorgement to investors who lost money, prejudgment interest, and a civil penalty of $135 million. It must also hire an independent compliance consultant to review its marketing communications and compliance policies to ensure that the services comply with federal law. In addition, the company is required to provide a copy of its Intelligent Portfolios marketing materials to clients. This way, investors can see for themselves if they are receiving a good deal or not.
Costs
A new lawsuit has been filed against Charles Schwab and its Intelligent Portfolios program. Customers of the program claim they lost money because Schwab overconcentrated their money in cash during the recent stock market boom. A Schwab spokeswoman declined to comment on the lawsuit. In a February 2015 brochure, the investment firm disclosed that its Intelligent Portfolios unit had 51% more cash than it did one year prior. While the company denies causing customers to lose money, it has admitted to using complex algorithms to manage its investors’ accounts.
Several customers of the Intelligent Portfolios program are filing this lawsuit. The suit alleges that Schwab improperly deposited excessive amounts of cash into customer accounts to increase its earnings margin. Schwab claims that there are no fees associated with its Robo-advisor, but the company is still making hundreds of millions of dollars in profit from the product. As a result, the company is facing a lawsuit that could cost as much as $1.5 billion.
My wife and I were Intelligent Portfolio investors from 2016-2020. Schwab has not been very forthcoming on the details of the settlement, specifically— when will the funds be distributed to investors and how much should we expect to receive?