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."
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Under the settlement with E*Trade, the brokerage will offer to repurchase all auction rate securities sold to California customers. E*Trade must also continue to use its best efforts to identify and locate customers who purchased eligible auction rate securities.
Terms of the settlement provide that E*Trade pay nearly $1.1 million in administrative penalties to the state and agree to abide by a Desist and Refrain order prohibiting violations of California's securities law, including failure to supervise its employees in the sale of auction rate securities.
Working with the North American Securities Administrators Association and other state regulators, the Department of Corporations has successfully settled auction rate securities cases with 14 brokerages. These settlements have covered up to $26 billion worth of securities potentially eligible for repurchase, and have resulted in penalties paid to California in excess of $67 million.
E*Trade has agreed to establish a dedicated toll-free telephone line and website by Jan. 16. E*Trade has committed to repurchase eligible securities through May 15, 2012.
The Department of Corporations is California's investment and financing authority and is responsible for the regulation, enforcement, and licensing of securities, franchises, off-exchange commodities, investment and financial services, independent escrows, consumer and commercial finance lending, residential mortgage lending, payday lenders, check sellers, bill payers, and debt reduction services.
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