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Out-Law News 1 min. read

On-line broker found liable to investor – again


An arbitration panel in the US has awarded over $200,000 to a customer of E*Trade Securities in the second decision of its kind in one week against the on-line brokerage firm. The award was in reimbursement of trading losses suffered in purchasing shares in theglobe.com.

Earlier this week, OUT-LAW.COM reported that an arbitration panel ordered E*Trade to pay $38,000 to another aggrieved investor in respect of a misstated share price.

According to the latest decision, the customer placed a market order in his margin account for the purchase of 5,000 shares in theglobe.com shortly before the market opened on 13th November 1998. Theglobe.com was not priced because that day was the first day of its public trading.

The customer claimed that E*Trade had represented that it would not allow a purchase unless the customer had sufficient buying power in his margin account to cover the purchase.

Theglobe.com’s opening was delayed for approximately 2 hours due to tremendous demand for the stock. An E*Trade trader estimated that the price of the shares would be no more than $27 each. However, the customer argued that E*Trade should have assumed a far higher price due to market indications.

In fact, theglobe.com opened at $90.00 per share. The customer's order was filled in an amount almost three times his margin account purchasing power. The stock promptly fell in price.

The customer argued that E*Trade had a duty to know that the theglobe.com order was well above his financial means. E*Trade asserted that it was unable to review this customer's order given the extreme demand that theglobe.com presented on November 13, 1998. The customer countered that lack of capacity to appropriately review orders is no defense.

The lawyer for the customer, James Eccleston, proclaimed the award as a great victory for investors and for full service stockbrokers. He said:

"This award reaffirms that on-line brokerage firms such as E*Trade Securities have greater customer protection responsibilities under the securities laws than simply to execute trades in return for lucrative payment for order flow and margin interest.”

Regarding stockbrokers, Eccleston said, “The E*Trade advertising campaign has mocked the important role that many stockbrokers play in serving investors. This case likely never would have happened had a stockbroker been present.”

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