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.
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:
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
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.