E*TRADE Financial Corporation ("E*TRADE") and its subsidiaries provide financial services including brokerage and banking products and services to traders, investors, stock plan administrators and participants, and registered investment advisers.
The original Complaint alleges that E*TRADE violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by deceiving investors about the investment characteristics of auction rate securities and the auction market in which these securities traded. Auction rate securities are either municipal or corporate debt securities or preferred stocks which pay interest at rates set at periodic “auctions.” Auction rate securities generally have long-term maturities or no maturity dates.
The Complaint alleges that pursuant to uniform sales materials and top-down management directives, E*TRADE offered and sold auction rate securities to the public as highly liquid cash-management vehicles and as suitable alternatives to money market mutual funds. According to the Complaint, holders of auction rate securities sold by E*TRADE and other broker-dealers have been unable to liquidate their positions in these securities following the decision on February 13, 2008 of all major broker-dealers to “withdraw their support” for the periodic auctions at which the interest rates paid on auction rates securities are set.
The Complaint alleges that E*TRADE failed to disclose the following material facts about the auction rate securities it sold to the class: (1) the auction rate securities were not cash alternatives, like money market funds, but were instead complex, long-term financial instruments with 30 year maturity dates, or longer; (2) the auction rate securities were only liquid at the time of sale because broker-dealers were artificially supporting and manipulating the auction rate market to maintain the appearance of liquidity and stability; (3) broker-dealers routinely intervened in auctions for their own benefit, to set rates and prevent all-hold auctions and failed auctions; and (4) E*TRADE continued to market auction rate securities as liquid investments after it had determined that broker dealers were likely to withdraw their support for the periodic auctions and that a “freeze” of the market for auction rate securities would result.
On June 11, 2008, Judge Sidney H. Stein consolidated the related cases and appointed John Oughtred, Roder Brenanhan and Srinivasan Murari as lead Plaintiffs. The Court appointed Stueve Siegel Hanson L.L.P. as lead Counsel. On December 18, 2008, the lead Plaintiffs filed a First Amended Class Action Complaint. The Defendants filed a motion to dismiss the First Amended Complaint on February 5, 2009.
On March 12 and 13, 2009, Plaintiff John W. Oughtred voluntarily dismissed his claims against the Defendants in the action. On March 18, 2010, Judge Sidney H. Stein granted the Defendant’s motion to dismiss the amended Complaint with instructions that if the Plaintiffs wish, they may replead on or before April 15, 2010. On April 22, 2010, the Plaintiffs filed a Second Amended Complaint, and the Defendants responded by filing a motion to dismiss on June 4, 2010.
According to the Opinion and Order signed by Judge Sidney H. Stein on March 31, 2011, Plaintiffs have not alleged facts supporting the strong inference of scienter required by extensive Supreme Court and Second Circuit authority in order to state a claim for relief pursuant to Section 10(b) and Rule 10b-5. Accordingly, Defendants' motion is granted in its entirety and the second amended Complaint is dismissed with prejudice.
