E*Trade Settles Auction Rate Securities Case But The Product Keeps On Giving Grief

May 16, 2012

NEW YORK, NY - NOVEMBER 16: Occupy Wall Street...

A lot of unhappy customers were burned by Auction Rate Securities -- and a lot of stockbrokers aren't too happy with the product either.

In a Financial Industry Regulatory Authority ("FINRA") ArbitrationStatement of Claim filed in December 2010, customer Claimant Najdzin asserted damages arising from breach of fiduciary duty, misrepresentation, omission of facts and unsuitability in connection with his purchase of various Blackrock and Eaton Vance auction rate securities ("ARS").  Claimant sought Claimant $125,000.00 in compensatory damages; $500,000 in punitive damages, plus interest attorneys' fees, and costs. In the Matter of the FINRA Arbitration Between Louis Najdzin,Claimant, vs. E*Trade Securities LLC, E*Trade Financial Corporation, and William John Velthaus, Respondents (FINRA Arbitration 10-05584, May 10, 2012).

Respondents E*Trade Securities LLC and Velthaus generally denied the allegations and asserted various affirmative defenses.

Respondent E*Trade Financial Corporation did not enter an appearance in this matter.

Respondents filed a Motion to Expunge Velthaus' Central Registration Depository records ("CRD"), which Claimant did not oppose.


In February 2012, the parties reached a settlement and, thereafter, an expungement telephonic hearing was held. The FINRA Arbitration Panel recommended the expungement of the arbitration from Respondent Velthaus's CRD.  In reaching that decision, the Panel reviewed the parties's December 1, 2011, Settlement Agreement and General Release; and also the transcript of a September 10, 2007, telephone conversation between Claimant and Velthaus during which Claimant decided to purchase the ARS in dispute.

Because this Panel presented its expungement rationale with great clarity, I offer their words to you:

Claimant bought the auction rate securities on September 10, 2007. The widespread failure of auction rate securities did not commence until February 2008. At the time of the sale, auction rate securities were not considered unsafe or imprudent. There was no significant history of auction failures. Mr. Velthaus testified there had been no major failures since that involving Drexel Burnham & Lambert some 18 years earlier. Claimant did not claim that Mr. Velthaus had information indicating the threat of likely auction failures that he suppressed.

The underlying securities were AAA rated New Jersey municipals. The transcript of the telephone conversation reveals that Mr. Velthaus also discussed with Claimant investing in FDIC insured certificates of deposit and United States government treasury securities, which he described as the "most safe, most liquid securities in the world" as alternatives to the auction rate securities.

E*Trade Securities was not an underwriter, market maker, auction agent or bidder for auction rate securities and did not have auction rate securities in inventory. Mr. Velthaus testified that he made a smaller commission on the sale of auction rate securities than he would have made on Claimant's purchase of the certificates of deposits or government securities he discussed with Claimant. Mr. Velthaus advised Claimant that E*Trade Securities "is being compensated by the issuer of the security".

Claimant is an experienced investor who carried debit balances, traded options and was able to evaluate risks. He stated in the telephone conversation with Mr. Velthaus "I'm pretty risk tolerant… I'm not opposed to risk. I mean, I understand the risks of the market… it's not like I'm going to say, ‘Hey, you lost me money'".

Bill Singer's Comment

Few products caused more harm than ARS - they angered many customers whose savings were tied up in the suddenly illiquid securities; and many stockbrokers were named in lawsuits and arbitrations concerning a product that, frankly, they had believed in and were victimized by. See some of these "Street Sweeper" articles:

Public Customer Seeks $1 Million From Oppenheimer in ARS Arbitration (December 2, 2011)

The Ghost of Bear Stearns Raised in $59 Million FINRA ARS Arbitration Against JP Morgan (November 8, 2011)

US Airways Lands $15 Million FINRA Auction Rate Securities Award (June 2, 2011)

Arbitration Litigates ARS Suitability (December 29, 2010)