eTrade 2012 Annual Report Download - page 27

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 February 3, 2010, a class action complaint was filed in the United States District Court for the Northern
District of California against E*TRADE Securities LLC by Joseph Roling on his own behalf and on behalf of all
others similarly situated. The lead plaintiff alleges that E*TRADE Securities LLC unlawfully charged and
collected certain account activity fees from its customers. Claimant, on behalf of himself and the putative class,
asserts breach of contract, unjust enrichment and violation of California Civil Code Section 1671 and seeks
equitable and injunctive relief for alleged illegal, unfair and fraudulent practices under California’s Unfair
Competition Law, California Business and Professional Code Section 17200 et seq. The plaintiff seeks, among
other things, certification of the class action on behalf of alleged similarly situated plaintiffs, unspecified
damages and restitution of amounts allegedly wrongfully collected by E*TRADE Securities LLC, attorneys’ fees
and expenses and injunctive relief. The Company moved to transfer venue on the case to the Southern District of
New York; that motion was denied. The Court granted the Company’s motion to dismiss in part and denied the
motion to dismiss in part. The Court bifurcated discovery to permit initial discovery on individual claims and
class certification. Following preliminary discovery, Plaintiffs moved to amend their verified complaint for a
second time, to assert new allegations and to add a plaintiff. The Company filed its opposition to this motion on
December 27, 2011. On March 27, 2012, the Court granted the Company’s motion for summary judgement and
granted the Company’s motion to dismiss. However, the Court allowed plaintiffs to seek a new class
representative and permitted limited discovery on a narrow issue as to when the fee increase was posted on the
Company’s website in 2005. On September 10, 2012, plaintiffs voluntarily withdrew the action with prejudice.
The Company paid no consideration for this dismissal, which was endorsed by the Court. There have been no
appeals of the Court’s order dismissing the action. This action is now closed.
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
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