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Firms Often Leave Investors At Mercy of Computer Errors

Wall Street Journal

Ali Lee Khadivi knew he had a problem with E*Trade when he was saddled with $71,000 of a stock he didn’t want. Then when the stock plunged 45%, he says the online broker liquidated his account to cover the loss, erasing more than $53,000 in savings.

His woes didn’t end there. After Mr. Khadivi called E*Trade repeatedly for an explanation, he got a response — from a collection agent, demanding he repay money E*Trade says he owed, or be reported to a credit-rating agency.

“It took me so long to accumulate those funds, and it was gone in no time,” says Mr. Khadivi, a 48-year-old software engineer in San Jose, Calif. “Losing my money like that and sending me to a collection agent — that was a double whammy.” E*Trade concedes the trade was an error, but says Mr. Khadivi is liable for the loss because he didn’t quickly complain.

So it goes for the casualties of the online-trading revolution. The big move to online from human brokers has ushered in a parallel shift in the kinds of problems investors face, and the complaints brokers hear. Critics say online brokers’ reliance on computers has at times left investors at the mercy of computer glitches and inexperienced or inadequate staff.

All brokers have faced investor complaints, of course. And comparative data on complaints against online brokers are hard to pin down. But a review of National Association of Securities Dealers records shows that E*Trade Securities — a unit of E*Trade Group of Menlo Park, Calif., and the nation’s fourth-largest online broker by assets and third-largest by accounts — has been involved in 51 arbitration cases since 1996. Of six major online brokers, only Charles Schwab had more, at 80, although it averaged nine times as many accounts in that period. Ameritrade Holding had fewer arbitrations, at 35, but more per 100,000 accounts.

One investor grouses that his E*Trade account showed he had turned a $12,200 investment into $2.4 million, when in fact he was losing money all along. Another customer tells of being kept on hold for seven hours (he says E*Trade told him it was three) after calling to resolve one of several mistakes he claims cost him $81,000.

“E*Trade [is] known for poor customer service even when its systems are working fine,” Forrester Research analyst James Punishill wrote in a report after early 1999’s rash of system outages. All online brokers since have improved, Mr. Punishill says, but E*Trade is “still the worst in customer service.” He says irate E*Trade customers regularly send him copies of their complaints when they don’t get a response from E*Trade.

Even regulators can’t always get answers from the company. In May, the National Association of Securities Dealers slapped E*Trade with an unusual censure and a $20,000 fine for its failure to respond to the regulator’s 17 separate requests from April through June 1999 for information needed to address customer complaints.

E*Trade declines to comment on individual complaints that are the subject of legal proceedings, but maintains that its overall record is good. Unhappy customers are “a very, very small percentage of our overall business and of all the satisfied customers we do have,” says spokesman Patrick Di Chiro, saying 95% of customers stay with E*Trade from one year to the next. He noted both the NASD action and some current customer complaints are based on events of early 1999 when E*Trade experienced “a systems interruption,” and it has since implemented improvements and had “no issues” like those the NASD raised.

With respect to the number of arbitrations, Mr. Di Chiro noted E*Trade’s size and that during E*Trade’s early stages of rapid growth, “there were hiccups in terms of technology.” But he says “instances of service interruptions are dramatically less today than a year and a half ago and at the same time our service has improved substantially.” As for dealing with customer complaints, he says: “Where it’s clear there’s been a problem on our side, we go out of our way to try to accommodate the customer.”

Mr. Di Chiro also disputes Mr. Punishill’s characterization of E*Trade’s record on customer satisfaction, noting that the firm was ranked first overall in a recent quarterly survey of online brokers by Internet commerce consultants Gomez Advisors. However, the same survey ranked E*Trade 10th in customer confidence. And a separate J.D. Power & Associates survey in August 1999 found E*Trade ranked below average of 14 online brokers in customer satisfaction.

What’s clear is that the Internet has made do-it-yourself investing accessible to millions of people who find dealing with brokers too intimidating or expensive. Online brokerage firms have rapidly increased their business by touting the control, speed and low cost of trading over the Net.

Moreover, the service problems partly reflect the growing pains of a new industry. Online brokers such as E*Trade “are a prisoner of their own success,” says a Beverly Hills, Calif., attorney whose firm represents Mr. Khadivi and several other unhappy E*Trade customers in arbitration cases against the firm.

Indeed, E*Trade kept spending heavily on marketing early last year even as the crush of activity strained its and other brokers’ capacity, while competitors Ameritrade and TD Waterhouse Group Inc. said they pulled back.

Steve Franco, an analyst at U.S. Bancorp Piper Jaffray, says E*Trade may attract more complaints than average because its rapid growth has attracted a more aggressive and demanding client than average. E*Trade is the fastest-growing online broker, according to Sanford C. Bernstein, thanks partly to one of the most expensive ad campaigns in dot-com history. It has more than 2.6 million customers accounts today, up from just 225,000 in September 1997, although according to Bernstein analyst Steve Galbraith, its average customer account, at $25,000, is among the smallest, and shrinking.

In settling the NASD censure case, E*Trade didn’t admit or deny wrongdoing, but acknowledged a “temporary spike” in complaints early in 1999. Still, Mr. Di Chiro says the firm is adding hundreds of customer-service representatives every month, is giving them more training, and has just opened a new $100 million technology and customer-service center near Atlanta.

Computer-system glitches and failures often are the cause of investor woes. In Mr. Khadivi’s case, he claims a computer error caused the problems in his account, which he opened about four years ago. By early 1999, he had accumulated $53,000 in trading profits. Then, that February, a few days after the high-profile initial public stock offering of technology company Perot Systems, Mr. Khadivi placed an order to buy 1,000 shares at no more than $71. A little later that same day, sensing the stock was weakening, he canceled the still unfilled order. Yet 40 minutes after receiving the cancellation, E*Trade executed the order anyway — which E*Trade itself concedes in its answer to Mr. Khadivi’s arbitration complaint, filed with the National Association of Securities Dealers.

But in that answer, E*Trade says Mr. Khadivi is to blame for his subsequent loss because he didn’t complain immediately. “He decided to gamble on [Perot] going up, perhaps in the belief that he could foist the loss on E*trade if [it] went down,” E*Trade said. Instead, the company claims Mr. Khadivi didn’t complain until five days later, when Perot had plunged 19%. E*Trade says it adjusted his purchase price to $69.50, the price at which he could have sold out the stock after learning he owned it, but “declined to cover Khadivi’s trading losses.”

Mr. Khadivi did phone E*Trade immediately and repeatedly, says his lawyer, Ryan Bakhtiari. But the investor says he can’t prove it because E*Trade has failed to act on numerous requests for phone records. At one point he was told such records wouldn’t be released without a subpoena or filing of an arbitration. Now that an arbitration has been filed, he’s still waiting. An E*Trade spokeswoman says the firm can’t comment on the case.

Another client of Mr. Bakhtiari, William Badgerow, claims that on Jan. 22, E*Trade executed his order to sell his 5,000 shares of Allaire Corp. twice instead of once, leaving him “short”; that is, having sold 5,000 shares he didn’t own and would have to repurchase, perhaps at a loss if the price rose. After discovering the mistake, he called E*Trade and was kept on hold for seven hours (though he was told it was three) then informed even though the sale wasn’t marked “short sale,” he would still be responsible for the trade. A few days later, he repurchased the shares at a higher price, for a loss of $23,000. It was just one of several E*Trade problems he claims ultimately cost him $81,000 in losses and $360,000 in lost profits.

Customers’ inexperience often leads to their unhappy experiences trading online. E*Trade, like all discount brokers, disclaims responsibility for an investor who loses money through unsuitable investing activity because it doesn’t make specific stock recommendations.

Scott Shields says he had no experience whatsoever trading stocks or options when he opened his E*Trade account in September 1999 with $12,200. He began trading stocks and options in Sprint Corp. and its wireless tracking stock, Sprint PCS. Almost each day, he says, E*Trade told him his equity and buying power had increased, so he used the fresh cash to expand his positions.

On Nov. 16, his account balance said he had $4.2 million of securities — representing equity of $2.4 million and a margin loan of $1.8 million. That day, he says an E*Trade representative told him that in fact he had a negative account balance of more than $40,000. He says he was told two weeks later — contrary to what E*Trade’s systems told him when he reviewed his account online — he had been losing money from the beginning. E*Trade, in a letter to a congressman who inquired on Mr. Shields’s behalf, says it forgave Mr. Shields’s debt and offered “not to report it to credit-reporting agencies,” but won’t repay his initial deposit.

Mr. Shields says while grateful that the debt was forgiven, he feels he should have his initial $12,200 back. Yes, his inexperience got him into trouble, but he says: “Someone should have looked at the account and said, ‘we screwed up.’ ” If he returns to investing, he says, he wants to deal with a human “I can see face to face and who can explain when I have a problem.”

E*Trade’s Mr. Di Chiro says the Net has “leveled the playing field” for investors but that they have a duty to inform themselves, adding: “There is a personal responsibility there.”