eTrade 2007 Annual Report Download - page 140

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 its financial position,
results of operations or cash flows. In each pending matter, the Company contests liability or the amount of
claimed damages. In view of the inherent difficulty of predicting the outcome of such matters, particularly in
cases where claimants seek substantial or indeterminate damages, or where investigation or discovery have yet to
be completed, the Company cannot predict with certainty the loss or range of loss related to such matters, how
such matters will be resolved, when they will ultimately be resolved, or what any eventual settlement, fine,
penalty or other relief might be. Subject to the foregoing, the Company believes that the outcome of any such
pending matter will not have a material adverse effect on the consolidated financial condition of the Company,
although the outcome could be material to the Company’s or a business segment’s operating results in the future,
depending, among other things, upon the Company’s or business segment’s income for such period.
An unfavorable outcome in any matter that is not covered by insurance could have a material adverse effect
on the Company’s business, financial condition, results of operations or cash flows. In addition, even if the
ultimate outcomes are resolved in the Company’s 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 the
Company’s results of operation.
Regulatory Matters
The securities and banking industries are subject to extensive regulation under Federal, state and applicable
international laws. As a result, the Company is required to comply with many complex laws and rules, and its
ability to comply is dependent in part on the establishment and maintenance of a qualified compliance system.
From time to time, the Company has been threatened with or named as a defendant in, lawsuits, arbitrations and
administrative claims involving securities, banking and other matters. The Company is also subject to periodic
regulatory audits and inspections. Compliance and trading problems that are reported to regulators, such as the
SEC, FINRA or OTS by dissatisfied customers or others are investigated by such regulators, and may, if pursued,
result in formal claims being filed against the Company by customers or disciplinary action being taken against
the Company or its employees by regulators. Any such claims or disciplinary actions that are decided against the
Company could have a material impact on the financial results of the Company or any of its subsidiaries.
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. ETCM was a specialist on the Chicago Stock Exchange during the period
under review. 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.
On October 17, 2007, the SEC initiated an informal inquiry into matters related to the Company’s loan and
securities portfolios. That inquiry is continuing. The Company is cooperating fully with the SEC in this matter.
Insurance
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; cyber liability; directors and officers; employment practices liability; certain criminal acts
against the Company; and errors and omissions. The Company believes that such insurance coverage is adequate
for the purpose of its business. The Company’s ability to maintain this level of insurance coverage in the future,
however, is subject to the availability of affordable insurance in the marketplace.
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