eTrade 2011 Annual Report Download - page 161

Several cases have been filed nationwide involving the April 2007 leveraged buyout (“LBO”) of the Tribune
Company (“Tribune”) by Sam Zell, and the subsequent bankruptcy of Tribune. In William Niese et al. v. A.G.
Edwards et al., in Superior Court of Delaware, New Castle County, former Tribune employees and retirees
claimed that Tribune was actually insolvent at the time of the LBO and that the LBO constituted a fraudulent
transaction that depleted the plaintiffs’ retirement plans, rendering them worthless. E*TRADE Clearing LLC,
along with numerous other financial institutions, is a named defendant, but has not been served with process. One
of the defendants removed the action to federal district court in Delaware on July 1, 2011. In Deutsche Bank
Trust Company Americas et al. v. Adaly Opportunity Fund et al., filed in the Supreme Court of New York, New
York County on June 3, 2011, the Trustees of certain notes issued by Tribune allege wrongdoing in connection
with the LBO. In particular the Trustees claim that the LBO constituted a constructive fraudulent transfer under
various state laws. E*TRADE Capital Markets, LLC, along with numerous other financial institutions, is a
named defendant. In Deutsche Bank et al. v. Ohlson et al., filed in the U.S. District Court for the Northern
District of Illinois, noteholders of Tribune asserted claims of constructive fraud. E*TRADE Capital Markets,
LLC is a named defendant. In EGI-TRB LLC et al. v. ABN-AMRO et al., filed in the Circuit Court of Cook
County Illinois, creditors of Tribune assert fraudulent conveyance claims against multiple shareholder
defendants. E*TRADE Clearing LLC is a named defendant. There have been several motions filed by various
parties to transfer venue and to consolidate these actions. The Company’s time to answer or otherwise respond to
the complaints has been stayed pending further orders of the Court. The Company will defend itself vigorously in
these matters.
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. 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 is unable to reasonably estimate a range of possible losses on its remaining
outstanding legal proceedings; however, the Company believes any losses would not be reasonably likely to have
a material adverse effect on the consolidated financial condition or results of operations of the Company.
An unfavorable outcome in any matter 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 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
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