eTrade 2002 Annual Report Download - page 35

Table of Contents
Index to Financial Statements
each then current member of the Company’ s Board of Directors, as individuals, in the Superior Court of the State of California, County of San
Mateo. Mr. Barry filed a “First Amended Shareholder Derivative Complaint” on or about February 26, 2002, for breach of fiduciary duties,
waste of corporate assets, abuse of control, and gross mismanagement for acts including, but not limited to, the Board’ s cancellation and
settlement of a $15.0 million loan to Mr. Cotsakos in exchange for his waiver of certain monetary and other rights under his employment
agreement; the Board’ s agreeing as part and parcel of the cancellation and settlement of the foregoing loan to make an additional payment to
Mr. Cotsakos of $15.2 million to compensate him for tax liabilities resulting from the cancellation and settlement of the foregoing loan; the
Board’ s approval of other loans to officers and directors, including a $15.0 million loan to founder and director William Porter; and the
Company’ s alleged failure to make full and adequate disclosures about such events in the Company’ s previous regulatory filings. Mr.Barry
sought damages allegedly sustained by the Company as a result of defendants’ alleged acts, as well as his attorney’ s fees and costs, against all
defendants except the Company. On or about April 30, 2002, demurrers (motions to dismiss) to Mr. Barry’ s First Amended Shareholder
Derivative Complaint were filed on behalf of nominal defendant E*TRADE Group, Inc., and the individually-named members of the
Company’ s Board of Directors, contending, among other things, that the Court must dismiss Mr. Barry’ s complaint because he failed to satisfy
his legal obligation to raise his concerns with the Company’ s Board of Directors before commencing legal action. Subsequently, all parties
agreed to enter into a memorandum of understanding to settle the matter under the terms of which the Company agreed, among other things,
without admitting any wrongdoing or liability, to make certain corporate governance enhancements and to pay certain attorneys fees and costs
incurred by Mr. Barry in prosecuting this action. On December 4, 2002, the Court approved the parties’ final settlement agreement and signed
the parties’ stipulated judgment of dismissal and the case has been dismissed with prejudice. Thereafter the Company paid the attorney’ s fees
and costs to which it had agreed. Most of the payment was covered by the Company’ s insurance. The Company is in the process of
implementing corporate enhancements to which it has agreed in the settlement.
Except as to matters that we have reported as settled or tentatively settled, we intend to vigorously defend against the foregoing claims. An
unfavorable outcome in any matters which are not covered by insurance could have a material adverse effect on our business, financial
condition and results of operations. In addition, even if the ultimate outcomes are resolved in our favor, the defense of such litigation could
entail considerable cost and the diversion of the efforts of management, either of which could have a material adverse effect on our results of
operation.
The securities and banking industries are subject to extensive regulation under federal, state and applicable international laws. As a result, we
are required to comply with many complex laws and rules and our ability to comply is dependent in large part upon the establishment and
maintenance of qualified compliance systems. From time to time, we have been threatened with, or named as a defendant in, lawsuits,
arbitrations and administrative claims involving securities, banking and other matters. We are also subject to periodic regulatory audits and
inspections. Such matters that are reported to regulators such as the SEC, the NYSE, the NASDR or the OTS by dissatisfied customers or others
are investigated by such regulators, and may, if pursued, result in formal claims being filed against us by customers and/or disciplinary action
being taken against us by regulators. Any such claims or disciplinary actions that are decided against us could have a material adverse effect on
our business, financial condition and results of operations.
The Company recently renewed its insurance coverage which management believes is reasonable and prudent. The principal insurance coverage
we maintain covers comprehensive general liability, commercial property damage, hardware/software damage, directors and officers,
employment practices liability, certain criminal acts against the Company and errors and omissions. We believe that such insurance coverage is
adequate for our business. Our ability to maintain this level of insurance coverage in the future, however, is subject to the availability of
affordable insurance in the market place.
Item 4. Submission of Matters To a Vote of Security Holders
None.
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