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Delays spur suit against E*Trade

Unsatisfied investors are hitting the electronic broker with a class-action suit, alleging the company took on more accounts than its system could handle.

Unsatisfied investors are hitting the electronic broker E*Trade Group (EGRP) with a class-action suit, alleging the company took on more accounts than its system could handle.

The lawsuit is one of the latest against the online trading industry. One investor, for instance, filed a lawsuit in October against Ameritrade, alleging late stock prices and transactions occurred with trades placed through Ceres Securities, which has since been acquired by Ameritrade. Some brokerage firms like Datek recently offered online investors compensation for delays incurred in executing trades long after they were placed.

In its complaint against E*Trade, the plaintiffs cited the tumultuous trading days of October 27 and 28, when the markets posted their largest one-day drop and one-day gains, respectively. The Dow Jones Industrials lost 554.26 points, or 7.2 percent, to fall to 7,161.15 on heavy volume of 693.7 million. The Nasdaq composite index, meanwhile, fell 115.83, or 7.02 percent, to 1,535.09 on volume of 919.6 million shares in early tallies.

That volume cost many investors time and money as delays in logging onto heavily trafficked electronic trading sites--including E*Trade's service--backed up systems, the lawsuit said. As E*Trade's systems got overloaded with requests, some investors were temporarily shut out of selling and then buying shares. The company felt compelled to send out an letter of apology.

The civil complaint filed on November 21 in California's Santa Clara County Superior Court seeks an injunction prohibiting the broker from advertising or marketing its services for new accounts until E*Trade's "system capabilities can handle not only the trades of members of the class but any trades that result from the opening of new accounts," according to the complaint.

The suit alleges the company has been aggressively marketing its services, while the system was not up to the new volume.

E*Trade now has 250,000 active accounts, up from 225,000 at the end of its fourth fiscal quarter, which ended September 30. That compares to 91,000 active accounts at the end of the fourth fiscal quarter of 1996.

That exponential growth of 175 percent is to blame for money lost due to delays in logging onto E*Trade's system, the suit claims. The lawsuit adds that when customers could log on, transactions were not executed in a timely manner, which also contributed to lost dollars in the volatile market.

E*Trade has not been served with the complaint but is aware of the action, said Kim Shepard, a company spokeswoman.

"Based upon our preliminary understanding at this point, we are confident that E*Trade has done nothing improper in this matter...Clearly, we intent to defend this litigation vigorously. Our track record reflecting a more than 90-percent customer retention rate underscores how fairly we treat our customers and speaks for itself," she said.

The company discloses in its annual report that "heavy stress placed on the company's systems during peak trading times could cause the company's systems to operate at an unacceptably low speed or fail...Delays could cause substantial losses for customers and could subject the company to claims from customers for such losses, including litigation claiming fraud or negligence."

The complaint also states that the company's alternative means of placing trades, such as telephone trades, also experienced delays due to busy lines and unanswered phones.

The plaintiffs, which did not ask for a specific damage amount, are asking the court to "restore to the members of the class all monies and property wrongfully acquired by means of E*Trade's deceptive practices" and to "enter an order awarding damages in an amount necessary to accomplish complete justice between the parties."