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E*Trade settles with NC over risky securities

Posted March 9, 2011

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— The North Carolina Secretary of State’s Office has settled its case against E*Trade Securities LLC over some securities sold to people as safe, short-term investments.

State regulators said Wednesday that E*Trade didn't tell potential investors of the risks involved in buying auction rate securities, or ARS. The market for the securities collapsed in early 2008, leaving dozens of people holding products that couldn't be resold.

At the time of the so-called "market freeze," E*Trade had at least 47 North Carolina investors holding about $8.4 million in auction rate securities, according to regulators.

The settlement calls for E*Trade to pay a $25,000 civil penalty and reimburse the state $400,000 for the cost of investigating the case. The company also had to show that it had compensated North Carolina investors for their losses.

“We have made tremendous progress in helping investors trapped with ARS holdings,” Secretary of State Elaine Marshall said in a statement. "Our plan is to keep pushing other companies to unfreeze these ARS investments.”

North Carolina is the first state to reach a settlement with E*Trade over auction rate securities, Marshall said. The state previously settled with Credit Suisse Securities (USA) LLC.

“We are incredibly pleased to be the first state where we were able to make sure the investors have been made whole, where a fine has been levied and where the bad practices used have been made public,” Marshall said.

The settlement also requires E*Trade to hire an independent consultant for two years to review the company's policies, training practices and marketing materials to ensure auction rate securities aren't being sold to investors improperly.

"The consultant will also keep our regulators in the loop about progress or problems the company is having meeting a higher standard of training and supervision," Marshall said. "This is a good thing for all customers with the company.”

Also, North Carolina investors who find they have suffered additional losses because money is tied up in auction rate securities can still enter into arbitration with E*Trade for additional damages, according to the settlement.

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