eTrade 2012 Annual Report Download - page 29

was assigned to the case. On March 28, 2012, a change of venue was granted and the case has been transferred to
the United States District Court for the Southern District of New York. The Company filed its answer and
counterclaim on June 13, 2012 and plaintiff has moved to dismiss the counterclaim. The Company filed a motion
for summary judgment. Plaintiffs sought to change venue back to the Eastern District of Texas on the theory that
this case is one of several matters that should be consolidated in a single multi-district litigation. On
December 12, 2012, the Multidistrict Litigation Panel denied the transfer of this action to Texas. The Company
will defend itself vigorously in this matter.
Several cases have been filed nationwide involving the April 2007 leveraged buyout (“LBO”) of the Tribune
Company (“Tribune”) by Sam Zell, and the subsequent bankruptcy of Tribune. In William Niese et al. v. A.G.
Edwards et al., in Superior Court of Delaware, New Castle County, former Tribune employees and retirees
claimed that Tribune was actually insolvent at the time of the LBO and that the LBO constituted a fraudulent
transaction that depleted the plaintiffs’ retirement plans, rendering them worthless. E*TRADE Clearing LLC,
along with numerous other financial institutions, is a named defendant in this case, but has not been served with
process. One of the defendants removed the action to federal district court in Delaware on July 1, 2011. In
Deutsche Bank Trust Company Americas et al. v. Adaly Opportunity Fund et al., filed in the Supreme Court of
New York, New York County on June 3, 2011, the Trustees of certain notes issued by Tribune allege
wrongdoing in connection with the LBO. In particular the Trustees claim that the LBO constituted a constructive
fraudulent transfer under various state laws. G1 Execution Services, LLC (formerly known as E*TRADE Capital
Markets, LLC), along with numerous other financial institutions, is a named defendant in this case. In Deutsche
Bank et al. v. Ohlson et al., filed in the U.S. District Court for the Northern District of Illinois, noteholders of
Tribune asserted claims of constructive fraud and G1 Execution Services, LLC is a named defendant in this case.
In EGI-TRB LLC et al. v. ABN-AMRO et al., filed in the Circuit Court of Cook County Illinois, creditors of
Tribune assert fraudulent conveyance claims against multiple shareholder defendants and E*TRADE Clearing
LLC is a named defendant in this case. There have been several motions filed by various parties to transfer venue
and to consolidate these actions. The Company’s time to answer or otherwise respond to the complaints has been
stayed pending further orders of the Court. The Court has set a motion schedule for omnibus motion to dismiss to
be heard on March 1, 2013. Discovery remains stayed during this period. The Company will defend itself
vigorously in these matters.
The Company recently completed a review of order handling practices and pricing for order flow between
E*TRADE Securities LLC and G1 Execution Services, LLC (G1X). The purpose of the review was to examine
whether E*TRADE Securities LLC was providing “best execution” of customer orders as well as otherwise
complying with applicable securities laws and dealing appropriately with its market making affiliate under
applicable federal bank regulatory standards. The review was conducted by separate firms of outside broker-
dealer and bank regulatory counsel. The firms’ reports identified shortcomings in the Company’s historical
methods of measuring best execution quality and suggested additions and changes to the Company’s standards,
processes and procedures for measuring execution quality and for monitoring and testing transactions between
the Bank and non-Bank affiliates to ensure compliance with relevant regulations. The Company is in the process
of implementing the recommended changes, and expects to complete the process in the near future. Banking
regulators and federal securities regulators were regularly updated during the course of the review. The
Company’s regulators may initiate investigations into its historical practices which could subject it to monetary
penalties and cease-and-desist orders, which could also prompt claims by customers of E*TRADE Securities
LLC. Any of these actions could materially and adversely affect the Company’s market making and trade
execution businesses.
In addition to the matters described above, the Company is subject to various legal proceedings and claims
that arise in the normal course of business. In each pending matter, the Company contests liability or the amount
of claimed damages. In view of the inherent difficulty of predicting the outcome of such matters, particularly in
cases where claimants seek substantial or indeterminate damages, or where investigation or discovery have yet to
be completed, the Company is unable to reasonably estimate a range of possible losses on its remaining
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