eTrade 2007 Annual Report Download - page 139

Appeal affirmed the above-described award against the Company for breach of the nondisclosure agreement but
remanded the case to the trial court for the limited purpose of determining what, if any, additional damages
Ajaxo may be entitled to as a result of the jury’s previous finding in favor of Ajaxo on its misappropriation of
trade secrets claim against the Company and defendant Everypath. Following the foregoing ruling by the Court
of Appeal, defendant Everypath ceased operations and made an assignment for the benefit of its creditors in
January, 2006. As a result, defendant Everypath is no longer defending the case. Although the Company paid
Ajaxo the full amount due on the judgment against it above, the case, consistent with the rulings issued by the
Court of Appeal, has now been remanded back to the trial court, and the re-trial of this case is now set to
commence on April 7, 2008, solely on the issue of what, if any, additional damages Ajaxo may be entitled to
receive on its misappropriation of trade secrets claim. In specific, Ajaxo continues to seek unstated monetary
damages and injunctive relief, lost profits in the amount of $500,000 per month since November, 1999, and
punitive damages. The Company denies that Ajaxo is entitled to any further damages or relief of any kind and
will vigorously defend itself against Ajaxo’s renewed damage claims.
On October 2, 2007, a class action complaint alleging violations of the federal securities laws was filed in
the United States District Court for the Southern District of New York against the Company and its Chief
Executive Officer and Chief Financial Officer entitled, “Larry Freudenberg, Individually and on Behalf of All
Others Similarly Situated, Plaintiff, versus E*TRADE Financial Corporation, Mitchell H. Caplan and Robert J.
Simmons, Defendants.” Plaintiff contends, among other things, that between December 14, 2006, and
September 25, 2007 (the “class period”) defendants issued materially false and misleading statements and failed
to disclose that the Company was experiencing a rise in delinquency rates in its mortgage and home equity
portfolios; failed to timely record an impairment on its mortgage and home equity portfolios; materially
overvalued its securities portfolio, which includes assets backed by mortgages; and based on the foregoing,
lacked a reasonable basis for the positive statements it made about the Company’s earnings and prospects.
Plaintiff seeks to recover damages in an amount to be proven at trial, including interest and attorneys’ fees and
costs. Four additional class action complaints alleging similar violations of the federal securities laws and
alleging either the same or somewhat longer class periods were filed in the same court between October 12, 2007
and November 21, 2007 by named plaintiffs William Boston, Robert D. Thulman, Wendy M. Davidson, and
Joshua Ferenc, respectively. On January 23, 2008, the trial court heard motions from various plaintiffs seeking to
be appointed lead plaintiff in these actions but has yet to issue its decision. Once the court rules on the lead
plaintiff motions, the cases are to be consolidated. A consolidated amended complaint is expected to be filed
within 60 days of the court’s ruling. The Company intends to vigorously defend itself against these claims.
Based upon the same facts and circumstances alleged in the Freudenberg class action complaint above, a
verified shareholder derivative complaint was filed in United States District Court for the Southern District of
New York on October 4, 2007, against the Company’s Chief Executive Officer, President/Chief Operating
Officer, Chief Financial Officer and individual members of its board of directors entitled, “Catherine Rubery,
Derivatively on behalf of E*TRADE Financial Corporation, Plaintiff, versus Mitchell H. Caplan, R. Jarrett
Lilien, Robert J. Simmons, George A. Hayter, Daryl Brewster, Ronald D. Fisher, Michael K. Parks, C. Catherine
Raffaeli, Lewis E. Randall, Donna L. Weaver, and Stephen H. Willard, Defendants, -and- E*TRADE Financial
Corporation, a Delaware corporation, Nominal Defendant.” Plaintiff alleges, among other things, causes of action
for breach of fiduciary duty, waste of corporate assets, unjust enrichment, and violation of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The above shareholder derivative complaint has
been consolidated with another shareholder derivative complaint brought in the same court and against the same
named defendants entitled, “Marilyn Clark, Derivatively On Behalf of E*TRADE Financial Corporation,
Plaintiff, versus Mitchell H. Caplan, et al., Defendants” (collectively, with the Rubery case, the “federal
derivative actions”). Three similar derivative actions, based on the same facts and circumstances as the federal
derivative actions but alleging exclusively state causes of action, have been filed in the Supreme Court of the
State of New York, New York County. These three cases have been ordered consolidated in that court under the
caption “In re: E*Trade Financial Corporation Derivative Litigation, Lead Index No. 07-603736” (the “state
derivative actions”). The Company intends to vigorously defend itself against the claims raised in the federal
derivative actions and state derivative actions.
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