For E*Trade, $34M Illegal-Trading Fine May Be the Least of Its Troubles

Fourteen firms had to settle charges of illegal trading with the SEC at the beginning of the month. Charged with so-called trading ahead between 1999 and 2005, they had to pay a collective $70 million. Trading ahead occurs when a firm places its own trade orders before those of its customers and recognizes extra gains as a result.

Sure, $70 million may be chump change on Wall Street, as other blogs have noted. But what's more interesting to me is that online brokerage firm E*Trade is on the hook for $34 million, or almost half of the total amount. The $34 million include $5.7 million in civil penalty, the rest being restitution of the cash clients were cheated on. It means that the trades E*Trade engaged in resulted in an overall disadvantage to its clients of about $28.3 million, according to the SEC (PDF link).

E*Trade's fine is almost five times what Susquehanna Investment Group has to pay, for instance. The SEC estimated that Susquehanna's actions cost its customers about $6.4 million, and ordered the firm to pay an extra $1.27 million in penalty. It also dwarfs Goldman Sachs's payment of $7.2 million for trading ahead, which includes $1.2 million in civil penalty.

I've heard that the $34 million won't likely increase the company's loss for the first quarter, thanks to legal reserves of $55 million, which will help foot the bill. But it won't help the company return to profitability, either.

E*Trade has been dealing with several challenges in the past year and a half, particularly continued losses in its mortgage-loan portfolio, which it runs in parallel to its online-brokerage business. E*Trade has already said total losses on home-equity loans in the three-year period ending 2010 will be 15-20 percent higher than its previous forecast of $1.8 billion, delaying its return to profitability.