⚠ The Cash Sweep LawsuitsModerate threat

Morgan Stanley (MS) — threat to the moat

Class actions accuse Morgan Stanley and E*TRADE of underpaying on swept cash, which is exactly where the deposit spread comes from.

The deposit spread is under legal challenge. Since February 2024, Morgan Stanley Smith Barney and E*TRADE Securities have been named in class actions alleging that they "failed to pay a reasonable rate of interest on its cash sweep products"1. The New York cases were consolidated as Estate of Sherlip v. Morgan Stanley, and a consolidated complaint in the New Jersey E*TRADE litigation was filed on 16 July 20262.

Cash sweep litigationFeb 2024first class actions filed2025SDNY casesconsolidated as Sherlip16 Jul 2026consolidatedE*TRADE complaintOpendamages unspecifiedMorgan Stanley Form 10-K FY2025 and Form 10-Q Q2 2026, legal proceedings
Two consolidated cases, no amount yet.

The claims include racketeering allegations and seek unspecified damages3. No amount has been accrued in the figures reviewed here.

The commercial risk is larger than any judgment. If sweep rates had to rise toward market rates, the spread that produces much of Wealth Management's $7,911 million of net interest income4 would narrow for every client, not only the plaintiffs.

The firm's own cost of deposits in Wealth Management was 2.76% on average in 20255. The plaintiffs' case concerns the rate paid on cash swept from brokerage accounts, which is typically lower than the average across all deposit products, and the firm has not disclosed an estimate of possible losses in the filings reviewed here.

The docket will move slowly. The figure that would register the pressure first is the segment's cost of deposits, 2.76% in 20256; a rise while market rates were flat would say the firm was paying more to settle the argument in practice.

References
  1. ReportedSince February 2024, Morgan Stanley Smith Barney and E*TRADE Securities have been named in class actions alleging that they "failed to pay a reasonable rate of interest on its cash sweep products".
    Morgan Stanley Form 10-K for fiscal 2025 - Item 1A risk factors, competition and legal proceedings. — FY2025 · publ. 19 February 2026 · source ↗
  2. ReportedThe New York cases were consolidated as Estate of Sherlip v. Morgan Stanley, and a consolidated complaint in the New Jersey E*TRADE litigation was filed on 16 July 2026.
    Morgan Stanley Form 10-Q for the quarter ended 30 June 2026 - capital requirements, legal proceedings including the cash-sweep litigation, and the 2026 bank-entity reorganisation. — Q2 2026 · publ. 4 August 2026 · source ↗
  3. ReportedThe claims include racketeering allegations and seek unspecified damages.
    Morgan Stanley Form 10-K for fiscal 2025 - Item 1A risk factors, competition and legal proceedings. — FY2025 · publ. 19 February 2026 · source ↗
  4. ReportedIf sweep rates had to rise toward market rates, the spread that produces much of Wealth Management's $7,911 million of net interest income would narrow for every client, not only the plaintiffs.
    Morgan Stanley Form 10-K for fiscal 2025 - segment results, revenue lines and regional net revenues. — FY2025 · publ. 19 February 2026 · source ↗
  5. ReportedThe firm's own cost of deposits in Wealth Management was 2.76% on average in 2025.
    Morgan Stanley Form 10-K for fiscal 2025 - Wealth Management metrics: client assets, flows, channels, deposits and adviser loans. — FY2025 · publ. 19 February 2026 · source ↗
  6. ReportedThe figure that would register the pressure first is the segment's cost of deposits, 2.76% in 2025; a rise while market rates were flat would say the firm was paying more to settle the argument in practice.
    Morgan Stanley Form 10-K for fiscal 2025 - Wealth Management metrics: client assets, flows, channels, deposits and adviser loans. — FY2025 · publ. 19 February 2026 · source ↗
Sources
Generated September 26, 2026