eTrade 2004 Annual Report Download - page 123

Table of Contents
Index to Financial Statements
Certain leases contain provisions for renewal options and rent escalations based on increases in certain costs incurred by the lessor. Rent
expense was $23.9 million for 2004, $31.4 million for 2003 and $29.2 million for 2002.
NOTE 26—COMMITMENTS, CONTINGENCIES AND OTHER REGULATORY MATTERS
Legal Matters
In June 2002, the Company acquired from MarketXT Holdings, Inc. (formerly known as Tradescape Corporation) (“Tradescape”) certain
entities referred to as Tradescape Securities, LLC, Tradescape Technologies, LLC and Momentum Securities, LLC. Numerous disputes have
arisen between the parties regarding value and responsibility for various liabilities that were first made apparent following the sale. The parties
have been unable to resolve these disputes and have each filed lawsuits. On April 8, 2004, Tradescape filed a complaint in the United States
District Court for the Southern District of New York against the Company, certain of its officers and directors and other third parties, including
Softbank Finance Corporation and Softbank Corporation, alleging that the defendants acted improperly in preventing plaintiffs from obtaining
certain contingent payments and claiming damages of $1.5 billion. On April 9, 2004, the Company filed a complaint in the United States
District Court for the Southern District of New York against certain directors and officers of Tradescape seeking declaratory relief and
monetary damages in an amount to be proven at trial for defendants’ fraud in connection with the 2002 sale transaction, including, but not
limited to, having presented the Company with fraudulent financial statements of the condition of Momentum Securities during the due
diligence process. The Company believes that Tradescape’s claims against it are without merit and intends both to vigorously defend the suit
and to fully pursue its own claims described above. In January 2005, the Company was notified that the NASD had made a preliminary
determination to recommend disciplinary action against the entity formerly known as Momentum for, among other things, failing to maintain
the required minimum net capital during the periods from December 2001 through June 30, 2002 and failing and neglecting to file accurate
financial reports for the period, in each case materially overstating its net capital. The Company is unable to predict the outcome of these
actions. Management believes that these actions will not have a material adverse effect on its financial condition, results of operations or cash
flows.
In 2003, the Company became involved in arbitration relating to the Company’s former Israeli joint venture. The E*TRADE Israel
venture was closed in 2002, as the Company’s partner in the joint venture failed. The Company had terminated the Israeli company’
s trademark
and technology license and sought damages based on failures to perform its obligations and the licensee had counterclaimed for unspecified
damages for such termination. Following the hearing of the arbitration, which took place during October 2004, the arbitration tribunal decided
against the Company and as a result, the Company recognized $14.5 million in additional exit charges for 2004.
In September 2001, the Company engaged in certain stock loan transactions that resulted in litigation between the Company and certain
counterparties to the transactions including Nomura Securities, Inc. and certain of its affiliates (“Nomura”) in two related lawsuits pending in
the United States District Courts for the District of New York and for the District of Minnesota. In the lawsuits, Nomura is seeking
approximately $10.0 million in damages and has asserted the right to keep an additional $5.0 million, plus interest, unspecified punitive
damages, attorney fees, and other relief from the Company for conversion and breach of contract. The Company has asserted claims and
defenses against Nomura relating to the same amount and alleges, inter alia , Nomura, among others, participated in a stock lending fraud and
violated federal and state securities laws among other allegations. In 2003, the parties stipulated to stay the New York matter pending the
completion of discovery in the Minnesota lawsuit. Through this lawsuit, the Company seeks, among other things, compensatory damages for
all expenses and losses that it has incurred to date or may incur in the future in connection with the stock lending litigation. Written discovery
and depositions have been taken in this matter. At this time, we are unable to predict the ultimate outcome of this dispute in relation to the
parties with which we have not settled. However, the ultimate resolution of this litigation may be material to the Company’s operating results
or cash flows for any
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