I wouldn't waste my time with small claims court, you signed a binding arbitration agreement when you opened up the account. The brokerages carefully guard these binding arb agreements becuase they protect them from otherwise unlimited litigation. If you do take it to small claims they will probably not show up, then appeal the verdict so it will go to a real court. You will then have to pay for a lawyer and the whole thing becomes more trouble then its worth.
Also, although I dislike E*Trade as much as you, what they did in your case is not even wrong. The industry standard when you ask to transfer an account is to transfer the stock or funds, not to automatically liquidate. Unless you specifically told them to liquidate prior to the transfer, they did the right thing by just transfering the fund. Although in your case it was adventageous to liquidate, most people are sitting on potential capitol gains that they don't want to have to pay just because they transfer brokers.