eTrade 2007 Annual Report Download - page 20

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.
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.
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.
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