eTrade 2011 Annual Report Download - page 24

Chief Executive Officer and Chief Financial Officer, Mitchell H. Caplan and Robert J. Simmons, respectively, by
Larry Freudenberg on his own behalf and on behalf of others similarly situated (the “Freudenberg Action”). On
July 17, 2008, the trial court consolidated this 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. On January 16, 2009, plaintiffs served their consolidated amended class action
complaint in which they also named Dennis Webb, the Company’s former Capital Markets Division President, as
a defendant. Plaintiffs contend, among other things, that the value of the Company’s stock between April 19,
2006 and November 9, 2007 was artificially inflated because the defendants 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 included assets backed by mortgages; and based
on the foregoing, lacked a reasonable basis for the positive statements 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. The parties entered into a Memorandum of Understanding (“MOU”) on December 17, 2011 to
settle these consolidated actions. Under the terms of the MOU, the Company and its insurance carriers will pay
$79 million in return for full releases. Approximately $10.8 million of the total settlement figure will be paid by
the Company, and was recorded in the other operating expense line item of the consolidated statement of income
(loss) for the year ended December 31, 2011. This settlement is subject to Court approval and it has not yet been
finalized. The defendants continue to deny that they committed any violations of law or breached any fiduciary
duty to shareholders.
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.
On August 15, 2008, Ronald M. Tate as trustee of the Ronald M. Tate Trust Dtd 4/13/88, and George
Avakian filed an action in the United States District Court for the Southern District of New York against the
Company, Mitchell H. Caplan and Robert J. Simmons based on the same facts and circumstances, and containing
the same claims, as the Freudenberg consolidated actions discussed above. By agreement of the parties and
approval of the court, the Tate action was consolidated with the Freudenberg consolidated actions for the purpose
of pre-trial discovery. Plaintiffs seek to recover damages in an amount to be proven at trial, including interest,
attorneys’ and expert fees and costs. The plaintiffs in this action will be part of the anticipated settlement class
for the consolidated actions described above.
Based upon the same facts and circumstances alleged in the Freudenberg consolidated actions discussed
above, a verified shareholder derivative complaint was filed in the United States District Court for the Southern
District of New York on October 4, 2007 by Catherine Rubery, against the Company and its then Chief
Executive Officer, President/Chief Operating Officer, Chief Financial Officer and individual members of its
board of directors. The Rubery complaint was consolidated with another shareholder derivative complaint
brought by shareholder Marilyn Clark in the same court and against the same named defendants. On July 26,
2010, Plaintiffs served their consolidated amended complaint, in which they also named Dennis Webb, the
Company’s former Capital Markets Division President, as a defendant. Plaintiffs allege, 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 complaint seeks, among other
things, unspecified monetary damages in favor of the Company, changes to corporate governance procedures and
various forms of injunctive relief.
On April 2, 2008, a class action complaint alleging violations of the federal securities laws was filed by
John W. Oughtred on his own behalf and on behalf of all others similarly situated in the United States District
Court for the Southern District of New York against the Company. Plaintiff contends, among other things, that
the Company committed various sales practice violations in the sale of certain auction rate securities to investors
between April 2, 2003, and February 13, 2008 by allegedly misrepresenting that these securities were highly
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