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E*Trade Must Repay Customer $60,000

After battling for a year and a half over a contested online stock trade, the National Association of Securities Dealers ordered online brokerage E*Trade to pay Ali Lee Khadivi of Palo Alto, Calif., the sum of $61,203.

As online trading grows increasingly popular, the number of related disputes grows right along with it, says Richard Ryder, editor of the Maplewood, N.J.-based Securities Arbitration Commentator newsletter. The NASD says that in 1999 it received only 55 complaints about online trading out of 5,600 total brokerage complaints, but Ryder suspects that figure is much higher. “Those figures just don’t demonstrate what I know anecdotally to be the case,” he says.

On Feb. 2, 1999, Khadivi logged on to E*Trade (nasdaq: EGRP) and bought a thousand shares of Perot Systems (nyse: PER) at $39 per share. Just two days later he flipped them when they hit $69.50 for a $30,000 profit.

Khadivi’s life would have been a lot less complicated if he had left it at that. But later on Feb. 4, Khadivi worried he’d gotten out of the stock too soon, and placed a limit order to buy another thousand shares at $71. (A limit order instructs a broker to buy a stock only when that stock hits a specified price.) About an hour later, at 10:23 A.M. Pacific Time, he had a change of heart and cancelled the order. According to the complaint filed by Khadivi’s attorneys, “E*Trade received confirmation of that cancellation at 11:03 A.M.”

Nevertheless, at 5:00 P.M. on Feb. 4, the Web brokerage notified Khadivi that those thousand shares were purchased on his behalf. Throughout that day E*Trade experienced system outages that are suspected of interfering with Khadivi’s cancellation request. An E*Trade spokesman says he could not say why the cancelled order went through. “It is a broker’s responsibility to cancel an order that has not yet been executed [when a trader submits a cancellation],” says Khadivi.

According to the complaint, Perot Systems shares sunk and Khadivi’s account was liquidated to the tune of $53,295.93. Recouping this tremendous loss was slow going for Khadivi. Although he began calling E*Trade on the day the incident took place, the brokerage did not launch an official inquiry until Feb. 9, according to Khadavi’s lawyer.

On March 15, E*Trade offered Khadivi a paltry settlement of $1,500. This offer was based on E*Trade’s mistaken belief that Khadivi sold his 1,000 shares at $69.50 after the contested order was executed in order to recoup some of his loss. In fact that trade was executed hours before the order in dispute was placed.

Khadivi’s attorney, says this was easily straightened out during arbitration once he made the chronology of these events clear to the E*Trade employee who headed the inquiry. “I said, ‘If you knew that the first trade was made long before the order in dispute, would that change your mind?’ And he said yes. All these online firms use inexperienced, poorly trained, overworked kids, so this simple fact went right past this guy.”

Regardless of this scrape, Khadivi says he’ll continue to trade online. “It’s convenient, it’s easy to get in and out of stocks if the system works, and if [the brokerage] makes a mistake they should take responsibility for it,” he says.

And if Khadivi or anyone else finds themselves in a similar position, Ryder has one piece of advice. “Whenever a trader is uncertain about what’s happening, get a screen shot that can be used as proof of what happened,” says Ryder.

Of course, whenever a trader swaps stocks online the caveat “buyer beware” should always be kept in mind. “You get what you pay for,” says Jupiter Communications analyst Rob Sterling. “If you go to a deep discounter you can’t expect the rapid response of a full-service broker.