eTrade 2012 Annual Report Download - page 28

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
or before February 13, 2008, if such auction rate securities had 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, 2012, no
existing Colorado customers held any auction rate securities, and the total amount of auction rate securities held
by E*TRADE Securities LLC customers nationwide was approximately $2.6 million. The Company recorded an
estimated liability of $48 million during the year ended December 31, 2011. During the second quarter of 2012,
the Company recorded a benefit of $10.2 million related to a reduction in the estimated liability as a result of the
completion of the Purchase Offer which expired on May 15, 2012. The estimated liability 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 estimated liability also included penalties and other
estimated settlement costs. The agreement included the resolution of all material individual auction rate securities
arbitrations and litigations.
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, 2012, 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 and multiple other unaffiliated financial services firms. Plaintiff
contends that the defendants engaged in patent infringement under federal law. Plaintiff seeks unspecified
damages and an injunction against future infringements, plus royalties, costs, interest and attorneys’ fees. On
September 30, 2011, the Company and several co-defendants filed a motion to transfer the case to the Southern
District of New York. Venue discovery occurred throughout December 2011. On January 1, 2012, a new judge
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