Thought everyone would get a kick out of the following. We are making history in more ways than one. The other will be the completion of the Squeeze.
Subject:
MONEY Daily: E*Trade under fire
Date:
Fri, 5 Dec 1997 18:51:23 EST
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Friday, December 5, 1997 6:45 p.m. EST
Under fire: Lawsuit claims E*Trade delivers poor
performance and unfavorable order execution
The company won't comment, but arch-rival Ameritech's
CEO defends the online brokerage giant
by Michael Brush
Given the Edvard Munch-like howl of protest against
E*Trade (www.etrade.com) that echoes through Internet
investing chat rooms -- deserved or not -- a lawsuit
against the high-profile online broker was probably
inevitable.
The outcome of a class action suit filed in California
last month, however, is far less certain.
At issue: Are the Web-based investors who love to
gripe about E*Trade mere whiners? Or is there
something behind their claims that the brokerage is
often inaccessible, and executes trades slowly and at
unfavorable prices?
Lawyers behind the suit filed in California Superior
Court against E*trade think so. They say the problem
stems from the fact that the company grew too fast in
the last year. That growth, they assert, meant E*Trade
was unable to keep up with its advertised claim that
it gives people "more control" over their investing by
offering trade executions and confirmations "in a
matter of seconds."
Hogwash, says E*Trade. In a prepared statement,
E*Trade states it has done nothing improper, and that
it will fight the suit to the finish. "Our track
record reflecting a more than 90% customer retention
rate underscores how fairly we treat our customers,
and speaks for itself."
The suit (http://www.etradeclassaction.com/), prepared
by the New York law firm of Bernstein Litowitz Berger
& Grossmann, says that the number of E*Trade customers
shot up between September 1996 and a year later from
91,000 to 225,000. The amount of assets increased from
$2.6 billion to $7.7 billion in the same period.
That's the kind of growth that would make any CEO
envious. Unless, of course, the amount of capacity
available to handle all those new clients did not keep
pace. And that is exactly what happened, say the
lawyers. They claim E*Trade capacity can only handle
around 10,000 to 15,000 users at the same time, or
about 7% of its account base -- not enough, in their
view.
"E*Trade's growth has outstripped its ability to
provide convenient and rapid securities trading to its
customers," says the lawsuit. "Quite simply, E*Trade
does not have and has not had the system capacity to
adequately support its accounts." Confirmations
sometimes come back as much as 24 hours late, it
claims, and market orders have taken almost 20 minutes
to execute. While problems were most severe during the
peak trading days of October 27 and 28, when the
market went through a dramatic correction,
complications were not limited to those days, the suit
says.
Lawyers behind the lawsuit state that in addition to
sluggishness, they will be able to demonstrate that
E*Trade regularly completed trades at prices that were
unfavorable to clients. "If you know when you put your
market order in and it was executed at a price that
did not occur for an hour afterwards, that is your
loss. It happened on a regular basis," says Daniel
Berger, a lawyer who helped prepare the suit.
One example the lawyers claim to have is the plaintiff
who initiated the class action suit, a Washington
resident named Larry Cooper who used his E*trade
account to invest part of a $60,000 settlement with
the Veterans Administration, the suit says. On
November 10, E*Trade bought him several thousand
shares of Syquest at about 22 cents (on a roughly $4
stock) above the prevailing price at the time he
placed his market order.
Lawyers believe they will be able to find enough other
traders like Cooper to make the suit worthwhile. They
also say they will be able to quantify in some way the
amount of damages sustained by people who wanted to
make trades but could not because the system was
blocked. The suit also charges that E*Trade's ads made
deceptive claims about its commissions.
While E*Trade refuses to comment on the suit, the
online brokerage has an odd defender in arch rival
Ameritrade's chairman and CEO, Joe Ricketts. "Even
though E*Trade is a competitor and they say bad things
about us, I think that the company is reputable enough
to take care of things when the customer has a
legitimate complaint," says Ricketts. "This business
is very competitive, very tough. But it is not full of
stupid people."
Ricketts speculates that in the interest of keeping
customers happy, E*Trade probably would have looked at
trading records to determine if there were a poor
execution, and offered a refund if need be, as is
standard industry practice. "I think the suit is
probably an attempt to force E*Trade into a settlement
to avoid the publicity. But they probably won't get to
first base."
Ricketts may be right. If the suit eventually does go
to trial, however, don't expect it to happen before
the fall of 1998, Bernstein Litowitz Berger &
Grossmann lawyers say.
Meanwhile, the market may be coming in with a verdict
of its own. Customers, it seems, were signing up at a
slower pace in November, though it is unclear whether
that was because of E*Trade snafus or competition from
cutthroat deep-discount brokers like Suretrade
(www.suretrade.com), Ameritrade (www.ameritrade.com)
and R.J. Forbes (www.rjforbes.com). There may also be
a decline in interest in the markets among Web
investors following the October correction and recent
weakness in tech stocks so popular among online
traders.
Whatever the reason, Wall Street has reacted, shaving
57% since early October off the value of E*Trade
stock, which traded this week in the low $20 range.
Investors who feel doubly slighted because they lost
money in the October correction and believe E*Trade
added insult to injury by offering poor service no
doubt think the markets brought at least some justice.
"As a former E*Trader -- this is my only solace,"
wrote an investor going by the name of Howard Bennett
in a chat room
(https://www.siliconinvestor.com/subject.aspx?subjectid=16047)
dedicated to bashing E*Trade at Silicon
Investor (www.techstocks.com). |
