State Securities Regulators Announce Settlement with E*TRADE in Auction Rate Securities Investigations

WASHINGTON, D.C., October 19, 2011 — The North American Securities Administrators Association (NASAA) today announced that a settlement in principle has been reached between E*TRADE Securities LLC and state securities regulators to return approximately $100 million to the firm’s clients who have had their funds frozen in the auction rate securities (ARS) market since 2008. The firm also will pay a $5 million fine.

Since the ARS market collapsed three years ago, state securities regulators have secured settlements calling for firms to repurchase from investors more than $61 billion in auction rate securities, the largest return of funds to investors in history.

The settlement with E*TRADE is the result of a multi-state investigation led by the Colorado Division of Securities into allegations that the firm misled clients by falsely assuring them that auction rate securities were a safe, liquid alternative to cash, certificates of deposit and money market funds. The ARS markets froze in February 2008, triggering complaints from investors who could not withdraw money from their accounts.

The settlement requires the New York-based firm to extend offers to repurchase auction rate securities from its retail customers nationwide.

“Today’s settlement will provide relief to E*TRADE investors who suffered from the collapse of the auction rate securities markets,” said Jack E. Herstein, NASAA President and Assistant Director of the Nebraska Department of Banking & Finance Bureau of Securities.

“This settlement reflects the collaborative and determined approach state securities regulators take to resolve a national problem. State securities regulators have not forgotten the hardships Main Street investors have faced and will continue to seek relief for those who suffered from the collapse of the ARS markets,” Herstein said.

Under the terms of the settlement, E*TRADE agreed to buy back at par value all outstanding auction rate securities purchased through the firm by individual investors before February 2008.

Other terms of the multi-state settlement require E*TRADE to:

  • Fully reimburse all individual investors who sold their auction rate securities at a discount after the auction market failed;
  • Consent to a special, public arbitration process to resolve claims of consequential damages suffered by individual investors who were unable to access their funds;
  • Maintain a dedicated toll-free telephone assistance line, website and email address to provide information about the terms of the final order and to answer questions from investors;
  • Reimburse certain investors for the cost of loans after the investor took out a loan from E*TRADE because the investor’s auction rate securities were frozen; and
  • Pay to the states monetary penalties of $5 million and reimburse certain costs of the investigation.

Herstein commended the work of state securities regulators in Colorado and Texas, who participated in the investigation and settlement negotiations, as well as those in North Carolina and Pennsylvania, who participated in the investigation.

The investigation into possible violations by E*TRADE is part of a larger, ongoing state-led effort to address problems in connection with the offer and sale of ARS investments. In 2008, state securities regulators began receiving hundreds of complaints from Main Street investors. As a result, in April 2008, NASAA announced the formation of a multi-state task force, comprised of securities regulators in 12 states, to investigate whether the nation’s prominent financial firms had systematically misled investors when placing them in ARS investments.

NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico.

For more information:
Bob Webster, Director of Communications
202-737-0900

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