Edward Jones Customers Revive Reverse Churning Lawsuit
Customers accusing Edward D. Jones & Co. of generating hundreds of millions of dollars in a “reverse churning” scheme have refiled their complaint, following dismissal of their putative class-action lawsuit by a federal judge last month.The core argument that Jones shifted clients to fee-based accounts that are more costly than traditional brokerage accounts remains, but the refiled complaint has been modified to overcome Eastern District of California federal judge John Mendez’ objections on the law, said Ivy T. Ngo, one of the lead counsels for the plaintiffs.
Lawyers eliminated several Jones executives and asset management units as defendants, added allegations from former advisors about inadequate suitability assessments and changed the focus of the charges to the firm’s breach of fiduciary duty, she said.
“We think it has a better chance this time,” Ngo said. “We need[ed] to lay it out more clearly.”
The lawsuit has drawn brokerage industry attention because many firms are promoting advisory over traditional transaction accounts that yield annual fees, regardless of clients’ trading patterns. Fee-based accounts also deter brokers from churning trades in order to generate commissions, according to industry executives.
“Edward Jones and its affiliated entities and individuals deny the allegations and intend to continue to vigorously defend this lawsuit,” the company wrote in a regulatory 10-Q filing on Monday.
Judge Mendez dismissed the initial case that was filed in March 2018 in the generally consumer-friendly California court. He accepted the St. Louis-based brokerage firm’s arguments that it provided “extensive disclosures” about the costs and benefits of fee-based accounts and that plaintiffs failed to illustrate “an actional deceptive scheme.”
While ruling that plaintiffs could update their lawsuit, the judge warned that “a further attempt to amend the complaint might prove futile.”
The refiled case focuses less on allegations of improper disclosure and more on contentions that Jones violated its fiduciary duty by moving largely buy-and-hold clients out of transaction-based accounts to ones that charged fees regardless of trading activity.
“Purely moving a client from a commission-based account to a fee-based account was a breach of fiduciary duty, regardless of what disclosures were made,” Ngo said.
The refiled complaint whittles the number of defendants from 16 named defendants and 100 “John Does” to five—Edward D. Jones & Co., Jones Financial Cos., EDJ Holding Co., former chief executive James D. Weddle and chief administrative officer Vincent “Vinny” J. Ferrari.
Weddle, who retired at the end of 2018, and Ferrari were responsible for failing to provide advisors with tools for analyzing the appropriateness of shifting customers to fee-based accounts, according to the lawsuit. Ferrari joined Jones in 2003 as a senior director for information systems.
“To help streamline the case, we are fine leaving a lot of the responsibility to the company generally,” Ngo said.