eTrade 2012 Annual Report Download - page 171

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 has submitted a Wells response to FINRA setting forth the bases for E*TRADE Securities LLC’s
belief that disciplinary action is not warranted. On June 27, 2012, FINRA advised E*TRADE Securities LLC that
it would not recommend disciplinary action in connection with this matter.
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. On March 8, 2011, E*TRADE Securities LLC, without admitting or denying the
underlying allegations, findings or conclusions, resolved the North Carolina administrative action by entering
into a consent order (“North Carolina Order”) pursuant to which E*TRADE Securities LLC agreed to pay a
$25,000 civil penalty and to reimburse the North Carolina Securities Division’s investigative costs of $400,000.
E*TRADE Securities LLC also agreed to various undertakings set forth in the North Carolina Order, including
additional internal training on fixed income products and the retention of an independent consultant to review
E*TRADE Securities LLC’s policies and procedures related to the approval and sale of fixed income products.
As of December 31, 2012, 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. 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 offered 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 NASAA whereby E*TRADE
Securities LLC offered 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 which E*TRADE
Securities LLC 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 offered to purchase (or offered 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
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