eTrade 2008 Annual Report Download - page 149

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 then 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.” By order dated July 17, 2008, the trial court consolidated the Freudenberg action with
four other purported class actions, all of which were filed in the United States District Court for the Southern
District of New York and which were based on the same facts and circumstances as the Freudenberg action. By
the same July 17, 2008 order, the trial court appointed the “Kristen-Straxton Group” and Ira Newman co-lead
plaintiffs and Brower Piven and Levi & Korsinski, respectively, as lead and co-lead plaintiffs’ counsel.
Thereafter, on January 16, 2009, Plaintiffs served their “Consolidated Amended Class Action Complaint for
Violations of the Federal Securities Laws.” In their amended complaint, Plaintiffs again name the Company’s
former chief executive and financial officers as defendants as well as Dennis Webb, the Company’s former
Capital Markets Division President. In their amended complaint, Plaintiffs allege causes of action for violations
of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 against all
defendants, and (2) violations of Section 20(a) of the Exchange Act against the individual defendants. In specific,
Plaintiffs contend, among other things, that the value of E*TRADE’s stock between April 19, 2006 and
November 9, 2007 (the “class period”) was artificially inflated because defendants, among other things, 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. Plaintiffs seek to recover damages in an amount to be proven at trial,
including interest and attorneys’ fees and costs. By prior order of the court, Defendants are to file their motion to
dismiss by April 2, 2009; and all parties are to complete briefing on Defendants’ motion to dismiss by August 17,
2009. The Company intends to vigorously defend itself against these claims.
On August 15, 2008, an action entitled, “Ronald M. Tate, Trustee of the Ronald M. Tate Trust Dtd 4/13/88,
and George Avakian, an Individual, Plaintiffs, versus E*TRADE Financial Corporation, Mitchell H. Caplan, an
Individual, and Robert J. Simmons, an Individual, Defendants” was filed in the United States District Court for
the Southern District of New York. The Tate action is based on the same facts and circumstances, and contains
the same claims, as the Freudenberg consolidated actions discussed above. By agreement of the parties and
approval of the court, the Tate action has been consolidated with the Freudenberg consolidated actions for the
purpose of pre-trial discovery.
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 then 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”). By agreement of the parties and approval of the respective courts, proceedings in both these
federal and state derivative actions will continue to trail those in the federal securities actions discussed above.
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