State of Colorado v ETrade Securities
16
NOTICE OF DUTY TO ANSWER, NOTICE TO SET, NOTICE OF HEARING, AND NOTICE OF CHARGES, AND NOTICE TO ENGAGE IN ALTERNATIVE DISPUTE RESOLUTION IN THE MATTER OF E*TRADE SECURITIES LLC, Respondent. TO: E*Trade Securities LLC 135 E. 57 th Street, 14 th Floor New York, NY 10022 NOTICE OF DUTY TO ANSWER YOU ARE HEREBY NOTIFIED that, pursuant to § 24-4-105(2)(b), C.R.S. (2009), you are required to file a written answer to the following Notice of Charges set forth below with the Office of Administrative Courts, 633 Seventeenth Street, Suite 1300, Denver, Colorado 80202, within thirty (30) days after the mailing date of this Notice of Duty to Answer, Notice to Set, Notice of Hearing, and Notice of Charges. You must also mail a copy of such answer to the Colorado Division of Securities’ (“Division”) attorneys of record in this matter, Sueanna P. Johnson and Alexander C. Reinhardt, Assistant Attorneys General, Office of the Attorney General, 1525 Sherman Street, 7 th Floor, Denver, Colorado 80203, within the same thirty-day time period. If you fail to file your written answer within thirty days as set forth above, then an order entering a default decision may be issued against you You are further advised that issuance of a default decision may grant the relief requested in the Notice of Charges, or such other relief or penalties that may be provided for by law, or both. NOTICE TO SET YOU ARE HEREBY NOTIFIED that the undersigned attorney or a representative of the Commissioner, will appear on August 17, 2010 at 11:00 a.m. in the Office of the Chief Administrative Law Judge, Office of Administrative Courts, 633 Seventeenth Street, Suite
description
Colorado Securities Commissioner Fred Joseph announced that the Securities Division Staff has filed charges against New York based broker‐dealer E*Trade Securities, LLC alleging that E*Trade Securities falsely represented auction rate securities as liquid, short‐term investments to Colorado investors without discussing the risks.
Transcript of State of Colorado v ETrade Securities
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21R:
BE
FO
RE
TH
ESE
CU
RIT
IES
CO
MM
ISS
ION
ER
ST
AT
EO
FC
OL
OR
AD
O
Case
No.
XY
2O1O
-
NO
TIC
EO
FD
UT
YT
OA
NS
WE
R,
NO
TIC
ET
OS
ET
,N
OT
ICE
OF
HE
AR
ING
,AN
DN
OT
ICE
OF
CH
AR
GE
S, A
ND
NO
TIC
ET
OE
NG
AG
EIN
AL
TE
RN
AT
IVE
DIS
PU
TE
RE
SO
LU
TIO
N
INT
HE
MA
TT
ER
OF
E*T
RA
DE
SE
CU
RIT
IES
LL
C,
Respondent.
TO
:E
*Trade
Securities
LL
C135
E.57
th
Street,14
th
Floor
New
York,N
Y10022
NO
TIC
EO
FD
UT
YT
OA
NS
WE
R
YO
UA
RE
HE
RE
BY
NO
TIF
IED
that,pursuantto
§24-4-105(2)(b),
C.R
.S.(2009),
youare
requiredto
filea
written
answer
tothe
following
Notice
ofC
hargesset
forthbelow
with
theO
fficeofA
dministrative
Courts,
633S
eventeenthStreet,
Suite1300,D
enver,C
olorado80202,w
ithinth
irty(30)
daysafter
them
ailingdate
of thisN
oticeofD
utyto
Answ
er,Notice
toSet, N
oticeofH
earing,and
Notice
ofCharges.
You
must
alsom
aila
copyof
suchansw
erto
theC
oloradoD
ivisionof
Securities’(“D
ivision”)attorneys
ofrecordin
thism
atter,Sueanna
P.Johnson
andA
lexanderC
. Reinhardt,A
ssistantA
ttorneysG
eneral,O
fficeofthe
Attorney
General,
1525Sherm
anStreet,
7thFloor,
Denver,
Colorado
80203,w
ithinthe
same
thirty-daytim
eperiod.
Ifyoufailto
fileyour
written
answer
within
thirtydays
asset
forthabove,
thenan
orderentering
adefault
decisionm
aybe
issuedagainsty
ou
You
arefurther
advisedthat
issuanceofa
defaultdecision
may
granttherelief requested
inthe
Notice
ofCharges,
orsuch
otherreliefor
penaltiesthat
may
beprovided
forby
law,
orboth.
NO
TIC
ET
OS
ET
YO
UA
RE
HE
RE
BY
NO
TIF
IED
thattheundersigned
attorneyor
arepresentative
ofthe
Com
missioner,w
illappear
onA
ugust17,2010
at11:00
a.m.
inthe
Office
oftheC
hiefA
dministrative
Law
Judge,O
fficeofA
dministrative
Courts,
633S
eventeenthStreet,
Suite
1300,D
enver,C
olorado80202,
inorder
toset
thedate,
time
andlocation
fora
hearingregarding
theN
oticeof
Charges
setforth
below.
You
may
bepresent
inperson
orby
counsel,or
youm
aym
akeprior
arrangements
tobe
reachedby
telephoneat
thetim
eand
datespecified
aboveby
contactingthe
Office
of
Adm
inistrativeC
ourtsat
(303)866-2000
priorto
theday
of
setting.
NO
TIC
EO
FH
EA
RIN
G
YO
UA
RE
HE
RE
BY
NO
TIF
IED
that,pursuant
to§
11-51-606(1),24-4-104
and24-
4-105,C
,R.S
.(2009),
ahearing
will
beheld
beforean
authorizedadm
inistrativelaw
judgeat
adate,
time
andlocation
tobe
detenninedpursuant
tothe
aboveN
oticeto
Set.A
tthe
hearing,testim
onyw
illbe
takenand
otherevidence
will
bereceived
bythe
administrative
lawjudge
forthe
purposeof
determining
whether
anyofthe
sanctionsset
forthin
§11-51-
410(1),
C.R
,S.
(2009)should
beim
posedupon
you,including
butnot
limited
tothe
revocationof
yourlicense
asa
broker-dealerfor
violationsof
11-51-410and
501,C
.R.S
.(2009).Y
OU
AR
EF
UR
TH
ER
NO
TIF
IED
thatat
thehearing
inthis
matter
youshall
havethe
rightto
appearin
personand/or
bylegal
counsel,to
presentevidence
onyour
own
behalf,to
cross-examine
anyw
itnesses,and
torebut
anyevidence
presented.Y
oum
ayalso
havesubpoenas
issuedon
yourbehalf
uponrequest
tothe
administrative
lawjudge.
Acopy
ofthe
General
Rules
ofP
rocedurem
aybe
obtainedat
theD
ivisionof
Adm
inistrativeH
earingsor
byvisiting
theirInternet
web
siteat:
http://ww
w.colorado.gov/dpaloac/gen_rules.htm
.
RE
LE
VA
NT
LE
GA
LA
UT
HO
RIT
Y
The
following
statutesand
rulesare
relevantto
theallegations
andcharges
made
inthe
Notice
of
Charges:
§11-51-410.
Denial,
suspension,or
revocation.
(1)T
hesecurities
comm
issionerm
ayby
orderdeny
anapplication
fora
license,suspend
orrevoke
alicense,
censurea
licensedperson,
limit
orim
poseconditions
onthe
securitiesactivities
thata
licensedperson
may
conductin
thisstate,
andbar
aperson
fromassociation
with
anylicensed
broker-dealer,investm
entadviser,
orfederal
coveredadviser
inthe
conductof
itsbusiness
inthis
statein
suchcapacities,
andfor
suchperiod
asthe
orderspecifies.
These
sanctionsm
aybe
imposed
onlyifthe
securitiescom
missioner
makes
afinding,
inaddition
tothe
findingsrequired
bysection
11-51-704(2),that
theapplicant
orlicensed
personor,
inthe
caseof
abroker-dealer
orinvestm
entadviser,
apartner,
officer,director,
personoccupying
asim
ilarstatus
orperform
ingsim
ilarfunctions,
orperson
directlyor
indirectlycontrolling
thebroker
dealeror
investment
adviser:
2
(b)H
asw
illfullyviolated
orw
illfullyfailed
tocom
plyw
ithany
provisiono
fthisarticle,
orany
ruleor
orderunder
thisarticle
(i)H
asfailed
tosupervise,
with
aview
topreventing
violationso
fthisarticle,
anotherperson
who
issubject
tothe.person’s
supervisionand
who
comm
itssuch
aviolation
(g)H
asw
illfullyengaged
ina
courseof
conductinvolving
theviolation
of
oneor
more
rulesm
adeby
thesecurities
comm
issionerthat
prohibitunfair
anddishonest
dealingsby
abroker-dealer
orsales
representative
§11-51-501.
Frau
dan
doth
erp
roh
ibited
conduct.
(1)It
isunlaw
fulfor
anyperson,
inconnection
with
theoffer,
sale,or
purchaseof
anysecurity,
directlyor
indirectly:
(a)T
oem
ployany
device,schem
e,or
artificeto
defraud;(b)
To
make
anyuntrue
statement
of
am
aterialfact
orto
omit
tostate
am
aterialfact
necessaryin
orderto
make
thestatem
entsm
ade,in
lightof
thecircum
stancesunder
which
theyare
made,
notm
isleading;or
(c)T
oengage
inany
act,practice,
orcourse
of
businessw
hichoperates
orw
ouldoperate
asa
fraudor
deceitupon
anyperson.
3C
CR
704-1,R
ule51-4.7.
Unfair
and
Dishonest
Dealings.
The
following
practicesshall
bedeem
edto
be“unfair
anddishonest
dealings”for
purposesof
section1l-51-410(l)(g),
C.R
.S.:
B.
Recom
mending
toa
customer
thepurchase,
saleor
exchangeo
fany
securityw
ithoutreasonable
groundsfor
believingthat
therecom
mendation
issuitable
forsuch
customer
uponthe
basisof
theinform
ationfurnished
bythe
customer
afterreasonable
inquiryconcerning
thecustom
er’sinvestm
entobjectives,
financialsituation
andneeds,
andany
otherinform
ationknow
nby
thebroker-dealer
orsales
representative;
NO
TIC
EO
FC
HA
RG
ES
YO
UA
RE
HE
RE
BY
NO
TIF
IED
ofthe
following
allegations:
3
Jurisdictionand
Parties
1.E
’Trade
Securities
LL
C(“E
*Trade”)
isa
limited
liabilitycom
panyorganized
underthe
laws
ofthestate
ofD
elaware
with
itsprincipal
placeof
businessin
New
York,
New
York.
At
alltim
esrelevant
tothis
action,E
*Trade
hasbeen
alicensed
broker-dealerin
thestate
of
Colorado.
2.P
ursuantto
§11-51-410(1)
and703(1),
C.R
.S.
(2009),the
Securities
Com
missioner
hasjurisdiction
overR
espondentand
thesubject
matter
of this
proceeding.
ST
AT
EM
EN
TO
FF
AC
TS
Sum
mary
of
theA
llegations
3.T
hisis
anaction
torevoke,
suspend,or
otherwise
impose
conditionson
thebroker-dealer
licenseof
E*T
radebased
uponthe
fraudulentsale
of
certain“auction
ratesecurities”
(“Auction
Rate
Securities”
or‘A
RS
”)in
andfrom
Colorado
toC
oloradoinvestors
inviolation
of
theanti-fraud
provisionsof
theC
oloradoS
ecuritiesA
ct.See
§11-51-501,
C.R
.S.
4.E
Trad
esold
AR
Sto
Colorado
investors,since
atleast
2005and
continuinguntil
theA
RS
market
collapsedcom
pletelyin
February
of
2008.In
sellingA
RS
,E
*Trade
salesrepresentatives
toldinvestors
thatA
RS
was
ashort-term
,cash-equivalent,
liquidinvestm
ent.C
ontraryto
theserepresentations,
theA
RS
market
dependson
acom
plicatedbidding
processcalled
a“D
utchauction.”
Inthe
eventthat
aD
utchauction
failsbecause
thereare
notenough
buyersto
bidon
thesale
ofA
RS
ata
certaininterest
rate,then
theA
RS
become
illiquid,long
terminvestm
entsuntil
theycan
besold
ata
futureauction.
E*T
radedid
notdisclose
toinvestors
thecom
plicatedD
utchauction
process,that
Dutch
auctionscould
failand
hadfailed
inthe
past,and
thatsuch
afailure
couldresult
inan
illiquidlong
terminvestm
ent.In
many
instances,E
*Trade
AR
Sinvestors
didnot
evenknow
theyw
ereinvested
inA
RS
.A
nd,in
truthand
material
factand
contraryto
thestatem
entsE
*Trade
made,
E*T
radeknew
therisk
thatA
RS
auctionscould
failw
henE
*Trade
soldA
RS
toC
oloradoinvestors.
Due
tothe
widespread
Dutch
auctionfailures
inF
ebruary2008,
Colorado
investorscannot
liquidatetheir
AR
Sholdings.
The
Securities
5.A
uctionR
ateS
ecuritiesinclude
afam
ilyof
investments
suchas
Municipal
Auction
Preferred
Stock
andA
uctionP
referredS
tock,as
well
asA
uctionR
ateC
ertificates,also
referredto
asA
uctionR
ateD
ebtS
ecurities.A
uctionR
ateS
ecuritiesare
generallylo
ng
4
termbonds,
with
maturity
datesin
many
instancesof
20or
30years.
Typically,
am
inimum
investment
inA
RS
is$25,000.
6.O
neof
thekey
featuresof A
uctionR
ateS
ecuritiesis
the“coupon”
orinterest
rate.T
hisinterest
rateis
resetperiodically,
typicallyon
a7,
28or
35day
cycle(although
otherreset
periodsexist).
The
interestrate
isreset
througha
biddingprocess
known
asa
“Dutch
auction.”
7.A
Dutch
auctionis
aprocess
whereby
sellersstate
theam
ountofA
uctionR
ateS
ecuritiesthat
theyw
ishto
sell,and
biddersstate
theam
ountof
Auction
Rate
Securities
theyw
ishto
purchaseand
them
inimum
interestrate
theyare
willing
toaccept.
The
purchasebids
areranked,
fromthe
lowest
tothe
highest,according
tothe
minim
uminterest
rateeach
bidderis
willing
toaccept.
The
lowest
interestrate
requiredto
sellall
of
theA
uctionR
ateS
ecuritiesat
auction,know
nas
the“clearing
rate,”becom
esthe
ratepaid
toall
holderso
fthat
particularbond
untilthe
nextauction.
This
processis
repeatedevery
7,28
or35
daycycle,
dependingupon
thereset
periodspecified.
8.T
hesuccess
orfailure
of
agiven
Dutch
auctiondepends
uponw
hetheror
notthere
areenough
buyersfor
everyauction
ratebeing
offeredfor
sale.If
anauction
issuccessful,
investments
inA
RS
remain
liquidbecause
investorscan
selltheir
AR
Sat
theauction.
How
ever,ifthe
actionfails,
investorsare
requiredto
holdall
orsom
eof
theirA
uctionR
ateS
ecuritiesuntil
thenext
successfulauction.
Thus,
theliquidity
of
anA
uctionR
ateS
ecurityrelies
uponthe
successfuloperation
of the
Dutch
auction.
9.B
roker-dealersfrequently
actedas
auctiondealers
forthe
Auction
Rate
Securities
thatthey
hadunderw
rittenand
theytypically
receiveda
percentageof the
totalsale
forfacilitating
theauction.
The
auctiondealer
solicitedthe
bidand
submitted
theorder
directlyto
anauction
agent.B
ecausethe
broker-dealeracted
asthe
auctiondealer
forthe
AR
Sthat
theyhad
underwritten,
theauction
dealerw
ouldlearn
aheado
ftime
whether
theA
RS
auctionw
ouldbe
successful,and
what
theclearing
ratew
ouldbe
forthat
issueofA
RS
.H
istorically,broker-dealers
actingas
theauction
dealerhave
steppedin
duringthe
caseof
auctionfailure
toplace
a“cover”
or“support”
bidon
theirow
nbehalf,
andw
ouldcarry
theA
RS
onthe
firm’s
own
proprietaryaccount
toprevent
auctionfailures.
Broker
dealers,therefore,
oftenhelped
sustainthe
market
forA
RS
becausethey
stoodto
profitfrom
thecontinuing
viabilityof
theA
RS
Dutch
auctionprocess.
10.A
nA
RS
issuershould
provideprospectuses
toinvestors
with
eachnew
issueo
fA
RS.
How
ever,secondary
AR
Sbuyers
thatpurchase
atD
utchauction
donot
receiveprospectuses.
11.T
heprospectus
typicallystates
that,in
theevent
ofan
auctionfailure,
theissuer
of the
Auction
Rate
Security
paysa
defaultinterest
rateuntil
thenext
successful
5
auction.In
some
cases,investors
may
haveA
uctionR
ateS
ecuritiesw
itha
defaultinterest
rateo
f0%
orotherw
isesignificantly
belowthe
market
rate.A
ninvestor
holdingan
Auction
Rate
Security,
inthe
eventof
auctionfailure,
may
berequired
tohold
theA
RS
andreceive
nointerest
payment
duringthe
perioduntil
thenext
auction,7,
28or
35days
later.C
ontinuousauction
failurew
ouldeffectively
resultin
anilliquid
investment
thatgenerates
noreturn
orinterest
forthe
investorholding
theA
RS
.
12.A
tits
peak,the
Auction
Rate
Securities
market
was
am
ulti-billiondollar
nationwide
market
basedin
partupon
representationsthat
theyw
erea
highlyliquid
“cashequivalent”
thatallow
edinvestors
todivest
theirholdings
asneeded.
Investorsw
ereled
tobelieve
thatthey
neededonly
wait
untilthe
nextregularly
scheduledauction
toliquidate
theirholdings.
Issuersw
erem
otivatedto
sellA
RS
becausecould
receivecash
ata
relativelylow
interestrate,
andinvestors
were
motivated
topurchase
AR
Sbecause
itw
asunderstood
tobe
aliquid
investment
thatw
asrelatively
safeand
yieldeda
higherinterest
ratethan
otherliquid
investments
thatpaid
interest,such
asm
oneym
arketaccounts.
Historically,
mostly
institutionalinvestors
purchasedA
RS
.
The
Failure
ofthe
Auction
Rate
Securities
Market
13.In
February
2008,the
Auction
Rate
Securities
market
seized,stranding
tenso
fthousands
of
investorsin
billionsof
dollarsw
orthof
longterm
investments.
The
freezingof
theA
uctionR
ateM
arketw
asthe
resultof
repeatedfailure
of
Dutch
auctionprocess
andthe
refusalof
broker-dealersthat
hadpreviously
perpetuatedthe
illusiono
fan
always-
functioningm
arketto
intervene.
14.T
hesystem
icauction
failuresstarting
in2008
didnot
representthe
firstexam
pleof
auctionfailures.
As
earlyas
1987and
1988,D
utchauctions
forA
RS
hadfailed
forlong
termbonds
issuedby
MC
orpand
Kroger.
In2006,
theS
ecuritiesand
Exchange
Com
mission
issueda
Cease
andD
esistO
rderim
posingsanctions
uponnum
erouslarge
broker-dealers,including
Bear,
Stearns
&C
o,C
itigroup,G
oldman
Sachs,
J.P.M
organS
ecurities,Inc.,
Lehm
anB
rothers,and
numerous
othersin
casenum
ber3-123
10,Inthe
Matter
ofB
ear,S
tearns&
Co.
Inc.et
al,(the
“SE
CC
&D
”).T
heS
EC
C&
Din
particularfound
thatthe
named
broker-dealersconduct
inthe
Dutch
auctionprocess
includedvarious
examples
of
interferencein
theA
RS
Dutch
auctionm
arket,including
(butnot
limited
to)bidding
toprevent
failedauctions.
15.T
heinterference
of
broker-dealersin
theD
utchauction
market
playeda
significantrole
inthe
illusionof
asm
ooth-functioningm
arket.B
ecausethe
auctiondealer
knewin
advanceof
apotential
failure,the
auctiondealer
couldstep
into
preventthe
auctionfailure.
When
broker-dealersstepped
into
preventauction
failure,they
typicallyplaced
acover
bidand
thencarried
theinvestm
enton
theirproprietary
accounts.T
hew
illingnessof
6
theauction
dealer—
typicallythe
issuingbroker-dealer
—to
stepin
toprevent
auctionfailure
createdan
impression
forinvestors
thatD
utchauctions
were
fail-safe.
16.B
ecausem
anybroker-dealers
tookA
RS
intotheir
own
accountsthrough
coverbids,
theybegan
sellingA
RS
toindividual
investorsthrough
theirretail
salesrepresentatives.
Inm
anyinstances,
salesrepresentatives
toldretail
investorsthat
AR
Sw
asa
short-term,
liquidinvestm
ent.
17.In
thelatter
partof
2007,several
of
theunderw
ritersof
AR
Sofferings
stoppedsubm
ittingcover
bidsin
some
typesof
AR
Sauctions.
This
resultedin
asignificant
number
of
failedA
RS
auctionsby
Novem
ber2007.
18.In
February
of
2008,the
market
forA
uctionR
ateS
ecuritiesw
hichhad
beensustained
inpart
bythe
broker-dealersand
auctiondealers
collapsedentirely.
Com
binedw
ithongoing
market
conditions,the
resultgenerally
was
afreeze
inthe
AR
Sauction
market,
anda
lossof
theonly
secondarym
arketfor
liquidatingthe
investments.
Retail
investorsw
hoheld
Auction
Rate
Securities
were
unableto
liquidatetheir
holdingsand
were
leftreceiving
thedefault
rateof
interest,w
hichin
certaininstances
was
aslow
as0%
.
E*T
rade’ssale
ofA
uctionR
ateS
ecurities
19.A
lthoughE
*Trade
markets
itselfas
alow
-costoption
forself-directed
investing,F
-Trade
alsooffers
financialadvisory
servicesand
sellscertain
financialproducts,
includingA
RS
.
20.E
*Trade
registeredsales
representativesroutinely
referredcustom
ersto
E*T
radefinancial
advisorsfor
investment
advice,w
hichincluded
theoffer
andsale
of A
RS
.
21.T
ocom
pletea
saleof
AR
S,
E*T
radefinancial
advisorsare
believedto
havesubm
itteda
customer’s
orderto
theE
*Trade
fixedincom
edesk
where
theorder
was
reviewed
andtransm
ittedto
theE
*Trade
AR
Sdistributor
forexecution.
22.E
*Trade
soldA
RS
toC
oloradoinvestors,
beginningin
atleast
2005and
continuingthrough
atleast
2007.E
*Trade
representativestold
Colorado
investorsthat
AR
Sw
asa
safe,liquid
investment,
comparable
toan
investment
ina
money
market
account.E
*Trade
didnot
explainthe
Dutch
auctionprocess
toinvestors,
thatD
utchauctions
couldfail
andhad
failedin
thepast,
andthat
inthe
eventthat
AR
Scould
notbe
soldat
Dutch
auctionthat
investorsw
ouldhold
anilliquid
long-terminvestm
ent.Investors
didnot
receivea
prospectusor
otherw
rittendisclosures,
andsom
ew
erenot
evenaw
arethat
theyhad
purchasedA
RS
.
7
23,E
*Trade
knewor
shouldhave
known
therisk
of
Dutch
auctionfailure
thatoccurred
in2007
and2008.
At
thevery
least,E
*Trade
knewthat
AR
Srelied
onthe
Dutch
auctionprocess,
howthe
processw
orked,and
thatauction
failurecould
resultin
theinvestor
holdingan
illiquidsecurity.
E*T
radew
asaw
areof
thepossible
collapseo
fthe
AR
Sm
arketdue
toprior
Dutch
auctionfailures
beginningin
thelate
1980s,the
practiceo
fbroker-dealers
submitting
coverbids
tosustain
theD
utchauction
process,and
the2006
SEC
C&
Dw
hichaddressed
broker-dealerinterference
with
theD
utchA
uctionprocess,
among
otherthings.
Furtherm
ore,in
October
2007,an
E*T
radeR
etailF
ixedIncom
eM
anagersent
anem
ailreferencing
anarticle
thatdetailed
thepossible
collapseofthe
AR
Sm
arket.E
*Trade
continuedto
sellA
RS
toC
oloradoinvestors
while
knowing
therisk
of
failureof
theD
utchauctions,
anddid
notfully
disclosethat
riskand
otherm
aterialfacts
toinvestors.
24.E
*Trade
soldapproxim
ately$15
million
ofA
RS
toapproxim
ately40
Colorado
investors,m
anyof
whom
havebeen
unableto
redeemtheir
AR
Sholdings
sinceF
ebruaryof
2008because
of
theD
utchauction
failuresin
theA
RS
markets.
25.T
heA
uctionR
ateS
ecuritiessold
toinvestors
are“securities”
ascontem
platedby
§11-51-201(17),
C.R
.S.,
inthat
theyare
atleast
“bonds,”“evidence
of
indebtedness,”and
“investment
contracts.”
Material
Misrepresentations
andO
missions
andF
raudin
theA
cts,P
ractices,or
Course
of
Business
26.In
connectionw
iththe
offer,purchase
andsale
of
securities,R
espondentE
*Trade,
eitherdirectly
orindirectly,
made
oralor
written
statements
toinvestors,
inand
fromthe
State
ofC
olorado,including,
butnot
limited
to,the
following:
a.T
hatA
uctionR
ateS
ecuritiesw
erea
fullyliquid
cashequivalent
similar
toa
money
market.
b.T
hatA
uctionR
ateS
ecuritiespositions
couldbe
liquidatedat
regularlyscheduled
periodssuch
as7,
28,or
35days.
c.T
hatA
uctionR
ateS
ecuritiesw
erea
safeshort-term
investment.
27.In
truthand
material
fact,and
contraryto
thestatem
entsm
adeby
Respondent
E*T
rade:
a.A
uctionR
ateS
ecuritiesare
onlyliquid
if thereare
sufficientparticipants
inthe
market
ready,w
illingand
ableto
purchasethe
securityat
thenext
regularlyscheduled
auction.b.
That
failureof
anauction
would
extendthe
periodnecessary
foran
investorto
wait
toliquidate
theirposition
inan
Auction
Rate
Security,
andthat
8
continuousauction
failurecould
indefinitelyextend
thisperiod
untilm
aturityof
theunderlying
investment,
upto
twenty
orthirty
years.c.
That
theongoing
failureof the
auctionm
arketw
ouldtrap
theinvestor
inthe
Auction
Rate
Security
untileither
thenext
successfulauction
orthe
maturity
ofthe
underlyinginvestm
ent,up
totw
entyor
thirtyyears.
28.In
connectionw
iththe
offerand
saleof
securities,R
espondent,directly
orindirectly,
failedto
disclosem
aterialfacts
toinvestors,
including,but
notlim
itedto,
thefollow
ing:
a.T
hatinvestors
were
purchasingauction
ratesecurities
andthe
risksinherent
insuch
purchases.b.
That
theA
RS
auctionshad,
inthe
past,been
supportedby
broker-dealersacting
asthe
auctiondealer.
c.T
hata
withdraw
alof
supportby
theauction
dealerfrom
theA
RS
auctionm
arketw
ouldresult
inthe
elimination
of
thesecondary
market
forA
uctionR
ateS
ecurities,thus
severelyrestricting
theirliquidity.
d.T
herisk
of
auctionfailure.
f.T
hatthe
liquidityofthe
investments
dependedupon
acom
plicatedD
utchauction
process.
29.B
asedon
theinform
ationcurrently
availableto
theC
omm
issioner,the
following
sub-paragraphsdetail
theknow
nschem
eto
defraudinvestors
andthe
acts,practices
andcourse
of
businessengaged
inby
theR
espondentto
defraudinvestors.
a.E
*Trade
Representative
Stuart
Allen
Torrey
sold$150,000
of
AR
Sto
Colorado
investorJ.O
.on
Novem
ber20,
2007.T
orreydescribed
theinvestm
entto
J.O.
asa
“cashequivalent”
and“short
termcorporate
paper”that
couldbe
soldon
aw
eeklybasis.
J.O.
purchasedanother
$100,000in
AR
Sthe
following
month,
resultingin
atotal
of
$250,000in
AR
Sholdings.
Neither
Torrey
norany
otherE
*Trade
representativetold
J.O.
thathe
was
purchasingA
RS
,and
thatA
RS
actuallyconsisted
of
longterm
investments
thatcould
become
illiquidif
theD
utchauction
processfailed.
J.O.
neverreceived
aprospectus
orother
written
disclosures.T
heseom
issionsm
adeE
*Trade’s
statements
regardingthe
investment’s
liquiditym
isleading.J.O
.still
holds$250,000
of
AR
S.
b.E
*Trade
representativeG
eoffG
reenfieldsold
Colorado
investorD
.W.
approximately
$4m
illionw
orthof
AR
Sin
Januaryof
2007.G
reenfieldtold
D.W
.that
AR
Sw
ereA
AA
rated,cash
equivalentinvestm
entsthat
couldbe
liquidatedat
auctionon
aw
eeklybasis.
Greenfield
alsotold
9
D.W
.that
theauctions
hadnever
failed.N
eitherG
reentieldnor
anyE
*Trade
representativeexplained
theD
utchauction
processto
D.W
.,that
theprocess
couldfail
andhad
failedin
thepast,
andthat
AR
Sw
ereactually
longterm
investments
thatrelied
onthe
Dutch
auctionprocess
fortheir
liquidity.D
.W.
didnot
receivea
prospectus.T
heseom
issionsm
adeE
*Trade’s
statements
regardingthe
liquidityo
fA
RS
misleading.
D.W
.still
hasapproxim
ately$1.5
million
inA
RS
holdings.
c.G
reenfieldor
otherE
*Trade
representativessold
approximately
$1.4m
illionw
orthof
AR
Sto
Colorado
investorG
.H.
onO
ctober18,
2007,and
1.2m
illionto
G.H
.on
Decem
ber3,
2007.E
*Trade
representativestold
Gil.
thatA
RS
were
safe,liquid,
cash-equivalentinvestm
ents.N
eitherG
reenfieldnor
anyE
*Trade
representativeexplained
theD
utchauction
processto
G.H
.,that
theprocess
couldfail
andhad
failedin
thepast,
andthat
AR
Sw
ereactually
longterm
investments
thatrelied
onthe
Dutch
auctionprocess
fortheir
liquidity.G
.H.
didnot
receivea
prospectus.T
heseom
issionsm
adeE
*Trade’s
statements
regardingthe
liquidityof
AR
Sm
isleading.G
.H.
stillow
nsapproxim
ately$1
million
inA
RS
.
d.C
oloradoinvestor
H.K
.,for
thebenefit
of
hisson’s
collegetrust
fundaccount,
purchased$100,000
worth
of
AR
Sin
late2005
froman
E*T
raderepresentative.
E*T
radetold
H.K
.that
AR
Sw
asshort-term
,safe,
andliquid
investment
thatcould
besold
everytw
ow
eeks.E
*Trade
representativesdid
notexplain
theD
utchauction
processto
D.W
.,that
theprocess
couldfail
andhad
failedin
thepast,
andthat
AR
Sw
ereactually
longterm
investments
thatrelied
onthe
Dutch
auctionprocess
fortheir
liquidity.H
.K.
didnot
receivea
prospectus.T
heseom
issionsm
adeE
*Trade’s
statements
regardingthe
liquidityof
AR
Sm
isleading.$100,000
worth
of
AR
Srem
ainsilliquid
inthe
collegetrust
fundaccount.
E*T
rade’sF
ailureto
Supervise
30.E
*Trade
associatedw
ithnum
erousfinancial
advisorsthat
engagedin
thesale
ofA
uctionR
ateS
ecurities,including
Greenfield
andT
orrey,w
hoare
licensedsales
representativesin
Colorado.
As
thebroker-dealer
employing
financialadvisors
making
offersand
salesof
securitiesin
andfrom
Colorado,
E*T
radeis
requiredby
lawto
adequatelyand
properlysupervise
theirconduct
with
aview
topreventing
violations.S
upervisionis
anessential
functionof the
broker-dealer.E
verybroker-dealer
isrequired
toestablish,
implem
ent,and
maintain
aset
of
written
supervisoryprocedures
anda
systemfor
implem
entingw
rittensupervisory
proceduresw
hichm
aybe
reasonablyexpected
toprevent
anddetect
theviolations
describedherein.
Establishm
entof
policiesand
proceduresalone
is
10
notsufficient
todischarge
supervisoryresponsibilities,
buton-going
monitoring
andreview
isnecessary
toensure
theprocedures
areeffective
inpreventing
anddetecting
violations.
31.E
*Trade
hadan
obligationto
ensurethat
itsfinancial
advisorsacting
assales
representatives,including
Greenfield
andT
orrey,w
ereproviding
fulldisclosure
of the
material
factsrequired
tobe
disclosedin
connectionw
iththe
offerand
saleo
fA
uctionR
ateS
ecurities.
32.E
*Trade
failedto
adequatelyand
properlysupervise
theconduct
of
itsregistered
salesrepresentatives,
includingG
reenfieldand
Torrey
inconnection
with
theoffer
andsale
of
Auction
Rate
Securities,
with
aview
topreventing
violationsby
theregistered
salesrepresentatives.
Respondent
E*T
radedirectly
orindirectly
failedto
reasonablysupervise,
with
aview
topreventing
violationsofthe
Act,
theactivities
of
itsretail
salesrepresentatives,
orfailed
toadopt
andim
plement
supervisoryprocedures
thatcould
reasonablybe
expectedto
preventand
detectviolations
of
theA
ct.T
hislack
of
supervisionor
apparentpervasive
ignoranceof
orcircum
ventionof
supervisorypolicies
andprocedures
hascaused
orsubstantially
contributedto
theoccurrence
ofthe
violationsdescribed
herein.
FIR
ST
CL
AIM
Securities
Frau
d(
11-51-501,C
.R.S
.)
33.P
aragraphs1
through32
areincorporated
hereinby
reference.
34.B
yengaging
inthe
conductset
forthabove,
inconnection
with
theoffer,
sale,or
purchaseof
securitiesin
Colorado,
Respondent
E*T
rade,diect1y,
orindirectly:
a.em
ployeda
device,schem
e,or
artificeto
defraudclients
orprospective
clients;b.
made
written
andoral
untruestatem
entsof
material
factor
omitted
tostate
material
factsnecessary
tom
akethe
statements
made,
inlight
ofthe
circumstances
underw
hichthey
were
made,
notm
isleading;or
c.engaged
inacts,
practicesor
coursesofbusiness
which
operatedand
would
operateas
afraud
anddeceit
oninvestors
allin
violationo
f11-51-501(1),
C.R
.S.
35.T
heconduct
of
Respondent
constitutesa
violationof
11-51-410(1)(b),C
.R.S.
underthe
Colorado
Securities
Act,
andconstitutes
groundsfor
theim
positiono
fsanctions
againstE
*Trade
pursuantto
§11-51-410(1),
C.R
.S.,
includingsuspension
orrevocation
oftheir
broker-dealerlicense
pursuantto
§11-51-410,
C.R
.S.
Inaddition,
11
pursuantto
§11-51-704(2),
C.R
.S.,
thesesanctions
arenecessary
andappropriate
inthe
publicinterest
andconsistent
with
thepurposes
andprovisions
of
theA
ct.
SE
CO
ND
CL
AIM
Failu
reto
Supervise
(11—
51—410(1)(i))
36.P
aragraphs1
through35
areincorporated
hereinby
reference.
37.D
uringall
times
relevantto
thisN
oticeo
fC
harges,E
*Trade
was
responsiblefor
thesupervision
of
itsfinancial
advisorsacting
assales
representativesin
thestate
of
Colorado,
includingG
reenfieldand
Torrey.
38.R
espondentE
*Trade
failedto
reasonablysupervise
itsfinancial
advisorsacting
assales
representatives,including
Greenfield
andT
orrey,w
itha
viewto
preventingviolations
of
theA
ct.A
sa
resultof
theR
espondent’sfailure
toreasonably
superviseits
financialadvisors
actingas
salesrepresentatives,
E*T
rade’sfinancial
advisorsacting
assales
representativessold
securitiesin
violationof the
anti-fraudprovisions
of the
Colorado
Securities
Act,§
11-51-501(1),C
.R.S
.
39.T
heconduct
of R
espondentE
*Trade
constitutesa
violationof
11-51-
410(1)(i),
C.R
.S.
underthe
Colorado
Securities
Act,
andconstitutes
groundsfor
theim
positionof
sanctionsagainst
E*T
radepursuant
to§
11-51-410(1),C
.R.S
.,including
suspensionor
revocationof
E*T
rade’sbroker-dealer
licensepursuant
to§
11-51-410,C
.R.S
.In
addition,pursuant
to§
11-51-704(2),C
.R.S
.,these
sanctionsare
necessaryand
appropriatein
thepublic
interestand
consistentw
iththe
purposesand
provisionsof
theA
ct.
TH
IRD
CL
AIM
Un
fairan
dD
ishonestD
ealingsU
nsuitability(
11-51-410(1)(g))
40.P
aragraphs1
through39
areincorporated
hereinby
reference.
41.R
espondentE
*Trade’s
salesrepresentatives
systematically
recomm
endedthe
purchase,sale
orexchange
of
asecurity
without
reasonablegrounds
forbelieving
thatthe
recomm
endationw
assuitable
forthe
investorbased
onthe
information
furnishedby
theinvestor
afterreasonable
inquiryconcerning
thecustom
er’sinvestm
entobjectives,
financialsituation,
andneeds
inviolation
of
Colorado
Securities
Com
missioner’s
Rule
51-4.7.B
(unsuitability).
12
42.T
heconduct
of
Respondent
E*T
radeconstitutes
aviolation
of
oneor
more
rulesm
adeby
theS
ecuritiesC
omm
issionerthat
prohibitunfair
anddishonest
dealingsin
violationof§
11-51-410(1)(g),
andconstitutes
groundsfor
theim
positionof
sanctionsagainst
E*T
radepursuant
to§
11-51-410(1),C
.R.S
.,including
suspensionor
revocationof
E*T
rade’sbroker-dealer
licensepursuant
to§
11-51-410,C
.R.S
.In
addition,pursuant
to§
11-51-704(2),C
.R.S
.these
sanctionsare
necessaryand
appropriatein
thepublic
interestand
consistentw
iththe
purposesand
provisionsof
theA
ct.WH
ER
EF
OR
E,
theS
taffrespectfully
requeststhat
anA
dministrative
Law
Judgeenter
aninitial
decisionrevoking,
suspendingor
otherwise
imposing
conditionsupon
thebroker-dealer
licenseof
E*T
radepursuant
to§
11-51-410,C
.R.S
.,and
forsuch
otherand
furtherrelief
asthe
Adm
inistrativeL
awJudge
deems
justand
proper.
DA
TE
DJuly
21st,
2010.
ST
AF
FO
FT
HE
DIV
ISIO
NO
FS
EC
UR
ITIE
SST
EO
FC
LO
RA
DO
GE
LD
R.IO
ME
Deputy
Securities
Com
missioner
1560B
roadway,
Suite
900D
enver,C
olorado80202
Tel:
(303)894-2320
Fax:(303)
861-2126
JOH
NW
.S
UT
HE
RS
AT
TO
RN
EY
GE
NE
RA
L
(j
Alexanderb.
Reinhardt,
34970*A
ssistantA
ttorneyG
eneralS
ueannaP.
Johnson,34840*
Assistant
Attorney
General
Attorneys
forthe
Staff
of
theD
ivisiono
fS
ecurities1525
Sherm
anS
treet,F
loorD
enver,C
olorado80203
Telephone:
(303)866-5255/5576
Facsim
ile:(303)
866-5395*counsel
of
record
ST
AT
EO
FC
OL
OR
AD
OO
FF
ICE
OF
AD
MIN
IST
RA
TIV
EC
OU
RT
S
OP
TIO
NT
OE
NG
AG
EIN
AL
TE
RN
AT
IVE
DIS
PU
TE
RE
SO
LU
TIO
N(M
ED
IAT
ION
)
CA
SE
NA
ME
:E
*Trade
Financial
Corporation
CA
SE
NU
MB
ER
:X
Y-2010-
This
agencydisciplinary
proceedingw
illbe
scheduledfor
hearingbefore
anadm
inistrativelaw
judgeof
theO
fficeofA
dministrative
Courts
(the“O
AC
”).T
heO
AC
encouragesparties
touse
alternativem
ethodsof
disputeresolution
andoffers
tothe
agencyand
respondentsthe
opportunityto
engagein
mediation.
Mediation
isa
processin
which
aneutral
thirdparty
meets
with
theparties
toassist
themin
reachinga
negotiatedsettlem
entof
thedisciplinary
proceeding.Ifthe
partiesare
ableto
reachan
agreement
inthis
way,
theyw
illcontrol
theoutcom
eof
thedisciplinary
caseby
agreeingto
asolution,
ratherthan
havinga
solutionim
posedupon
themby
anadm
inistrativelaw
judgeafter
ahearing.
Inm
ediation,the
mediator
facilitatescom
munication
between
theparties
ina
private,confidential
andinform
alm
eeting.If
aparty
hasan
attorney,the
attorneyw
illparticipate.
The
mediator
hasno
decision-making
authority;no
settlement
orsolution
tothe
disciplinarycase
will
beachieved
unlessboth
partiesare
inagreem
ent.A
mediator
canoften
helpthe
partiesgenerate
creativeoptions
toresolve
thedisciplinary
case,even
thoughthose
optionsw
ouldnot
beavailable
ifthe
caseproceeded
toa
hearingbefore
anadm
inistrativelaw
judge.M
ediatorsm
aybe
ableto
assistthe
partiesin
reachinga
settlement
evenw
herethe
parties’prior,
unassistednegotiations
havefailed
toresult
inan
agreement.
Ifboth
partiesagree
tom
ediatethis
disciplinarycase
theym
aynotify
theO
AC
,w
hichw
illassign
anadm
inistrativelaw
judgeor
otherqualified
mediator
toconduct
them
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oticeofD
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oticeofC
hargesupon
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same
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this21st
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