eTrade 2010 Annual Report Download - page 166

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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.
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. On
February 9, 2011, E*TRADE Securities LLC received a “Wells Notice” from FINRA Staff stating that they have
made a preliminary determination to recommend that disciplinary action be brought against E*TRADE
Securities LLC for alleged violations of certain FINRA rules in connection with the purchases of auction rate
securities by customers of E*TRADE Securities LLC. E*TRADE Securities LLC is cooperating with these
inquiries and will submit a Wells response to FINRA setting forth the bases for E*TRADE Securities’ belief that
disciplinary action is not warranted. As of December 31, 2010, the total amount of auction rate securities held by
all E*TRADE Securities LLC customers was approximately $138.2 million.
On January 19, 2010, the North Carolina Securities Division filed an administrative petition before the
North Carolina Secretary of State against E*TRADE Securities LLC seeking to revoke the North Carolina
securities dealer registration of E*TRADE Securities LLC or, alternatively, to suspend that registration until all
North Carolina residents are made whole for their investments in auction rate securities purchased through
E*TRADE Securities LLC. E*TRADE Securities LLC is defending that action. As of December 31, 2010, no
existing North Carolina customers held any auction rate securities.
On July 21, 2010, the Colorado Division of Securities filed an administrative complaint in the Colorado
Office of Administrative Courts against E*TRADE Securities LLC based upon purchases of auction rate
securities through E*TRADE Securities LLC by Colorado residents. The complaint seeks to revoke, suspend, or
otherwise impose conditions upon the Colorado broker-dealer license of E*TRADE Securities LLC. E*TRADE
Securities LLC is defending that action. As of December 31, 2010, the total amount of auction rate securities held
by Colorado customers was approximately $3.7 million.
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