According to regulatory filings with the Securities and Exchange Commission (SEC), earlier this month regulatory authorities sent a "Wells Notice" to E*Trade Securities alleging securities law violations in connection with the firm's sale of Auction Rate Securities. A Wells Notice is not a finding of wrongdoing, but a letter that describes the securities law violations that staff recommends pursuing. E*Trade contends that the action is unwarranted and that the company is cooperating with the investigation.
Recently in Auction Rate Securities Category
Colorado Securities Commissioner Files Notice of Charges Against E*Trade Securities Regarding Auction Rate Securities
My securities law firm is currently involved in a securities arbitration claim against E*Trade on behalf of a California non-profit organization that purchased $2 million worth of Auction Rate Securities (ARS) at the recommendation of their E*Trade financial advisor who representated to them that ARS were highly liquid, short-term cash management vehicles paying a slightly better rate of return that could be sold at par with no loss of principal. The issues in my case are nearly identical to the allegations set forth in the "Notice of Charges" recently filed against E*Trade by the Securities Commssioner for the State of Colorado on July 21, 2010, charging E*Trade Securities LLC with securities fraud in connection with the firm's sale of ARS.
If you purchased ARS at the recommendation of an E*Trade financial advisor, I'd love to hear about your experience.
In a nutshell, here's what the State of Colorado is alleging:
- E*Trade financial advisors represented ARS as a safe, liquid investment, comparable to a money market account.
- E*Trade failed to explain the auction process to investors; that auctions could fail; and that investors would be left holding an illiquid long-term investment if the auctions failed.
- E*Trade knew or should have known the risk that auctions would fail--and did in fact fail in 2007 and 2008.
- Early on, E*Trade was aware of the possible collapse of the ARS market due to prior auction failures and regulatory action, among other warning signs.
Thomas Weisel Partners LLC based in San Francisco, California, was named in a securities fraud lawsuit filed by the Financial Industry Regulatory Authority (FINRA) alleging that the firm and the head of its fixed income desk, Stephen Henry Brinck Jr., sold $15.7 million worth of auction rate securities (ARS) to customers out of the firm's own accounts without their customers' knowledge or consent. FINRA's complaint further alleges that, after "stuffing" customer accounts with ARS, the firm gave false and misleading information to its customers about the transactions in an attempt to have the customers forfeit their right to take any legal action against the firm. (FINRA Case #2008014621701).
Although my earlier blog posting about securities arbitration results in San Francisco was less rosy, today's Wall Street Journal article, "Investors Win More Broker Cases," did contain a bit of encouraging news for brokerage firm customers who may be considering whether to file a securities arbitration claim. The article noted that customers who went all the way to hearing before the Financial Industry Regulatory Authority (FINRA) have prevailed 45% of the time so far this year compared to just 37% in 2007. In other words, investors are winning a larger percent of cases than they did in the past, but they are still losing 65% of the time. The WSJ article also noted that awards to investors for claims under $1 million were averaging about 50% of the damages requested.
[Blogger's note: See my year-end update, "Securities Arbitration Award Results for 2009 Better Than Expected for San Francisco Investors"]
Most Investor Claims Involve Mutual Funds
The WSJ article also makes a point of saying that a "good chunk" of the cases filed in the last two years involve auction rate securities. FINRA started keeping track of ARS cases on January 1, 2008. A total of 299 ARS cases were filed in 2008. This year, there have been 215 ARS cases filed through September 2009. A significant trend that was overlooked in the WSJ article is the fact that disputes involving mutual funds are the most frequently arbitrated type of securities product. This year, there have already been 1,272 mutual fund cases filed through September 2009--an amount that eclipses the total number of mutual fund cases filed in 2007 and 2008 combined.
Most Investor Claims Allege Breach of Fiduciary Duty and Misrepresentation
According to FINRA, the two most common types of customer complaints for 2009 are breach of fiduciary duty and misrepresentation. However, there are limitations to FINRA's statistics. For example, FINRA only includes four claim types for every case that is filed. This may explain why unsuitability--a widely alleged customer complaint--did not rank as high as it probably should have.
Securities Fraud Case Filed Against San Francisco-Based Charles Schwab for Fraudulent Sales of Auction Rate Securities (ARS)
Today, New York Attorney General Andrew Cuomo filed a securities fraud lawsuit against San Francisco-based Charles Schwab & Co. charging the firm with making false representations in the sale of auction rate securities (ARS). According to the complaint filed by the Attorney General, Schwab misrepresented auction rate securities as suitable for customers seeking a safe and liquid investment. The Attorney General has obtained telephone recordings of conversation between Schwab brokers and customers, including one instance where a broker made misrepresentations to their customer stating that auction rate securities are "great alternatives to cash." Schwab sold hundreds of millions of dollars worth of auction rate securities to its customers who were undoubtedly mislead about inherent risks associated with these complex investments.