eTrade 2011 Annual Report Download - page 26

securities through E*TRADE Securities LLC by Colorado residents. On October 19, 2011, E*TRADE Securities
LLC and the Colorado Division of Securities reached an agreement in principle to settle the Colorado proceeding
whereby E*TRADE Securities LLC will offer to purchase auction rate securities held by Colorado customers
who found themselves unable to sell their securities after those securities had been frozen in the broader auction
rate securities market. The agreement in principle also included an agreement with the North American Securities
Administrators Association (“NASAA”) whereby E*TRADE Securities LLC will offer to purchase auction rate
securities purchased through E*TRADE Securities LLC on a nationwide basis and pay a $5 million penalty to be
allocated among 48 states and the District of Columbia, Puerto Rico and the Virgin Islands but exclusive of
North Carolina and South Carolina with whom E*TRADE Securities previously had reached separate
settlements. Under the agreement in principle each state will receive its allocated share of the $5 million penalty
pursuant to administrative consent cease and desist orders to be entered into by each state. A Consent Order
memorializing the agreement in principle as it related to Colorado customers was entered by the Colorado
Securities Commissioner on November 16, 2011, and amended on November 23, 2011, whereby E*TRADE
Securities LLC, without admitting or denying the underlying allegations, agreed to pay an administrative penalty
to Colorado of $84,202, which amount constituted Colorado’s share of the total NASAA state settlement amount
of $5 million, and to reimburse the Colorado Division of Securities’ costs associated with the administrative
action in the amount of $596,580. Under the terms of the Consent Order, E*TRADE Securities LLC will offer to
purchase (or offer to arrange a third party to purchase), at par plus accrued and unpaid dividends and interest,
from eligible investors nationwide their auction rate securities purchased through E*TRADE Securities LLC, or
through an entity acquired by the Company on or before February 13, 2008, if such auction rate securities have
failed at auction at least once since February 13, 2008 (“the Purchase Offer”). E*TRADE Securities LLC also
agreed to identify eligible investors who purchased auction rate securities through E*TRADE Securities LLC on
or before February 13, 2008, and sold those securities below par between February 13, 2008, and November 16,
2011, and to reimburse those sellers the difference between par value and the actual sales price plus reasonable
interest. E*TRADE Securities LLC agreed to hold open the Purchase Offer until May 15, 2012, and to various
other undertakings set forth in the Consent Order, including the establishment of a dedicated toll-free telephone
assistance line and website to provide information and to respond to questions regarding the Consent Order. As
of December 31, 2011, the total amount of auction rate securities held by Colorado customers was approximately
$1.2 million and the total amount of auction rate securities held by E*TRADE Securities LLC customers
nationwide (including Colorado customers) was $61.3 million. The Company recorded a reserve of $48 million
in the other operating expense line item of the consolidated statement of income (loss). The reserve represented
the Company’s estimate of the current fair value relative to par value of auction rate securities held by
E*TRADE Securities LLC customers, as well as former customers who purchased auction rate securities through
E*TRADE Securities LLC and are covered by the Consent Order. The agreement includes the resolution of all
material individual auction rate securities arbitrations and litigations. The reserve also includes penalties and
other estimated settlement costs.
On August 24, 2010, the South Carolina Securities Division filed an administrative complaint before the
Securities Commissioner of South Carolina against E*TRADE Securities LLC based upon purchases of auction
rate securities through E*TRADE Securities LLC by South Carolina residents. The complaint sought to suspend
the South Carolina broker-dealer license of E*TRADE Securities LLC until South Carolina customers who
purchased auction rate securities through E*TRADE Securities LLC and who wished to liquidate those positions
were able to do so, and sought a fine not to exceed $10,000 for each potential violation of South Carolina statutes
or rules. On March 25, 2011, E*TRADE Securities LLC, without admitting or denying the underlying
allegations, findings or conclusions, resolved the South Carolina administrative action by entering into a consent
order, pursuant to which E*TRADE Securities LLC agreed to pay a $10,000 civil penalty and to reimburse the
South Carolina Securities Division’s investigative costs of $2,500. As of December 31, 2011, no existing South
Carolina customers held any auction rate securities.
On May 16, 2011, Droplets Inc., the holder of two patents pertaining to user interface servers, filed a
complaint in the U.S. District Court for the Eastern District of Texas against E*TRADE Financial Corporation,
E*TRADE Securities LLC, E*TRADE Bank N.A. and multiple other unaffiliated financial services firms.
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