eTrade 2006 Annual Report Download - page 17

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Company has moved to dismiss certain counterclaims brought by MarketXT including those described above, as
well as certain counterclaims brought by Mr. Amanat. In a ruling dated September 29, 2006, the Bankruptcy
Court in the MarketXT case granted the Company’s motion to dismiss four of the six bases upon which
MarketXT asserts its fraud claims against the Company; its conversion claim; and its demand for punitive
damages. In the same ruling, the Bankruptcy Court denied in its entirety MarketXT’s competing motion to
dismiss the Company’s claims against it. On October 26, 2006, the Bankruptcy Court subsequently dismissed
MarketXT’s “promissory estoppel” claim. The Company continues to believe that the respective claims brought
against it by MarketXT and Omar Amanat are without merit, and the Company will continue both to vigorously
defend itself against all such claims and to fully pursue its own claims and damages as described above.
The SEC, in conjunction with various regional securities exchanges, is conducting an inquiry into the
trading activities of certain specialist firms, including the Company’s subsidiary E*TRADE Capital Markets,
LLC (“ETCM”), on various regional exchanges in order to determine whether such firms executed proprietary
orders in a given security prior to a customer order in the same security (a practice commonly known as “trading
ahead”) during the period 1999 – 2005. The SEC has indicated that it will seek disgorgement, prejudgment
interest, and penalties from any firm found to have engaged in trading ahead activity to the detriment of its
customers during that time period. It is possible that such sanctions, if imposed against ETCM, could have a
material impact on the financial results of the Company during the period in which such sanctions are imposed.
The Company and ETCM are cooperating with the investigation.
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 or cash flows. In addition, even if the ultimate
outcomes are resolved in our favor, the defense of such litigation could entail considerable cost or the diversion
of the efforts of management, either of which could have a material adverse effect on our results of operations. 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 could have a material adverse effect on our financial position, results of
operations or cash flows.
We maintain insurance coverage that we believe is reasonable and prudent. The principal insurance
coverage we maintain covers commercial general liability; property damage; hardware/software damage; cyber
liability; 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 the purpose of 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 marketplace.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14