eTrade 2009 Annual Report Download - page 164

asserts breach of contract, unjust enrichment and violation of California Civil Code Section 1671 and seeks
equitable and injunctive relief for alleged illegal, unfair and fraudulent practices under California’s Unfair
Competition Law, California Business and Professional Code Section 17200 et seq. The plaintiff seeks, among
other things, certification of the class action on behalf of alleged similarly situated plaintiffs, unspecified
damages and restitution of amounts allegedly wrongfully collected by E*TRADE Securities LLC, attorneys fees
and expenses and injunctive relief. The Company intends to vigorously defend itself against the claims raised in
this action.
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 business, financial condition, results of operations or cash flows.
Regulatory Matters
The securities and banking industries are subject to extensive regulation under federal, state and applicable
international laws. 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, OTS or FDIC 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.
In the second quarter of 2009, the OTS advised the Company, and the Company agreed, that it was
necessary to raise additional equity capital for E*TRADE Bank and reduce substantially the amount of the
Company’s outstanding debt in order to withstand any further deterioration in credit and market
conditions. Subsequently, the Company strengthened its capital structure by successfully raising $733 million in
net proceeds from stock offerings in the second and third quarters of 2009 to further support E*TRADE Bank
and enhance the Company’s liquidity. In addition, the Company exchanged $1.7 billion aggregate principal
amount of its interest-bearing corporate debt for an equal principal amount of newly-issued non-interest-bearing
convertible debentures.
On October 17, 2007, the SEC initiated an informal inquiry into matters related to the Company’s mortgage
loan and mortgage-related securities investment portfolios. The Company is cooperating fully with the SEC in
this matter.
Beginning in approximately August 2008, representatives of various states attorneys general and FINRA
initiated inquiries regarding the purchase of auction rate securities by E*TRADE Securities LLC’s customers.
E*TRADE Securities LLC is cooperating with these inquiries. As of February 19, 2010, the total amount of
auction rate securities held by all E*TRADE Securities LLC customers was approximately $169.7 million.
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