E*Trade Securities LLC has agreed to return up to $20 million to California investors over allegations that the company misrepresented auction rate securities to investors as safe, cash-equivalent products, even though the products faced increasing liquidity risk.

The negotiation was reached with the California Department of Corporations. An auction rate security is a non-conventional, fixed income, long-term security whose dividend rates are reset periodically at auctions at set weekly or monthly intervals.

"This multi-million dollar agreement provides relief for many individuals and small business investors who lost access to funds in the collapse of the auction rate securities market," Commissioner Jan Lynn Owen said. "We are pleased that this negotiation with E*Trade will return money to many investors who suffered losses and illiquidity when the auctions failed and their assets were frozen."