eTrade 2011 Annual Report Download - page 162

made a preliminary determination to recommend that disciplinary action be brought against E*TRADE
Securities LLC for alleged violations of certain FINRA rules in connection with the purchases of auction rate
securities by customers of E*TRADE Securities LLC. E*TRADE Securities LLC is cooperating with these
inquiries and has submitted a Wells response to FINRA setting forth the bases for E*TRADE Securities’ belief
that disciplinary action is not warranted.
On January 19, 2010, the North Carolina Securities Division filed an administrative petition before the
North Carolina Secretary of State against E*TRADE Securities LLC seeking to revoke the North Carolina
securities dealer registration of E*TRADE Securities LLC or, alternatively, to suspend that registration until all
North Carolina residents are made whole for their investments in auction rate securities purchased through
E*TRADE Securities LLC. On March 8, 2011, E*TRADE Securities LLC, without admitting or denying the
underlying allegations, findings or conclusions, resolved the North Carolina administrative action by entering
into a consent order (“North Carolina Order”) pursuant to which E*TRADE Securities LLC agreed to pay a
$25,000 civil penalty and to reimburse the North Carolina Securities Division’s investigative costs of $400,000.
E*TRADE Securities LLC also agreed to various undertakings set forth in the North Carolina Order, including
additional internal training on fixed income products and the retention of an independent consultant to review
E*TRADE Securities LLC’s policies and procedures related to the approval and sale of fixed income products.
As of December 31, 2011, no existing North Carolina customers held any auction rate securities.
On July 21, 2010, the Colorado Division of Securities filed an administrative complaint in the Colorado
Office of Administrative Courts against E*TRADE Securities LLC based upon purchases of auction rate
securities through E*TRADE Securities LLC by Colorado residents. On October 19, 2011, E*TRADE Securities
LLC and the Colorado Division of Securities reached an agreement in principle to settle the Colorado proceeding
whereby E*TRADE Securities LLC will offer to purchase auction rate securities held by Colorado customers
who found themselves unable to sell their securities after those securities had been frozen in the broader auction
rate securities market. The agreement in principle also included an agreement with the North American Securities
Administrators Association (“NASAA”) whereby E*TRADE Securities LLC will offer to purchase auction rate
securities purchased through E*TRADE Securities LLC on a nationwide basis and pay a $5 million penalty to be
allocated among 48 states and the District of Columbia, Puerto Rico and the Virgin Islands but exclusive of
North Carolina and South Carolina with whom E*TRADE Securities previously had reached separate
settlements. Under the agreement in principle each state will receive its allocated share of the $5 million penalty
pursuant to administrative consent cease and desist orders to be entered into by each state. A Consent Order
memorializing the agreement in principle as it related to Colorado customers was entered by the Colorado
Securities Commissioner on November 16, 2011, and amended on November 23, 2011, whereby E*TRADE
Securities LLC, without admitting or denying the underlying allegations, agreed to pay an administrative penalty
to Colorado of $84,202, which amount constituted Colorado’s share of the total NASAA state settlement amount
of $5 million, and to reimburse the Colorado Division of Securities’ costs associated with the administrative
action in the amount of $596,580. Under the terms of the Consent Order, E*TRADE Securities LLC will offer to
purchase (or offer to arrange a third party to purchase), at par plus accrued and unpaid dividends and interest,
from eligible investors nationwide their auction rate securities purchased through E*TRADE Securities LLC, or
through an entity acquired by the Company on or before February 13, 2008, if such auction rate securities have
failed at auction at least once since February 13, 2008 (“the Purchase Offer”). E*TRADE Securities LLC also
agreed to identify eligible investors who purchased auction rate securities through E*TRADE Securities LLC on
or before February 13, 2008, and sold those securities below par between February 13, 2008, and November 16,
2011, and to reimburse those sellers the difference between par value and the actual sales price plus reasonable
interest. E*TRADE Securities LLC agreed to hold open the Purchase Offer until May 15, 2012, and to various
other undertakings set forth in the Consent Order, including the establishment of a dedicated toll-free telephone
assistance line and website to provide information and to respond to questions regarding the Consent Order. As
of December 31, 2011, the total amount of auction rate securities held by Colorado customers was approximately
$1.2 million and the total amount of auction rate securities held by E*TRADE Securities LLC customers
nationwide (including Colorado customers) was $61.3 million. The Company recorded a reserve of $48 million
in the other operating expense line item of the consolidated statement of income (loss). The reserve represented
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