eTrade 2004 Annual Report Download - page 27

Table of Contents
Index to Financial Statements
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 particular period. The Company believes that its current reserves are adequate in view of its assessment of exposure at
this time.
Except as to matters that we have reported as settled or tentatively settled, we intend to defend vigorously against the foregoing claims.
An unfavorable outcome in any matter that is not covered by insurance could have a material adverse effect on our business, financial
condition, results of operations and cash flows. 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. In addition to the matters described above, the Company is subject to various legal proceedings and claims that arise in
the normal course of business, which we believe will not have a material adverse effect on our financial position, results of operations or cash
flows.
The Company maintains insurance coverage that management believes is reasonable and prudent. The principal insurance coverage it
maintains covers commercial general liability, property damage, hardware/software damage, directors and officers, employment practices
liability, certain criminal acts against the
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