eTrade 2003 Annual Report Download - page 108

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Table of Contents
Index to Financial Statements
NOTE 25—COMMITMENTS, CONTINGENCIES AND OTHER REGULATORY MATTERS
Legal Matters
In September 2001, the Company engaged in certain stock loan transactions that resulted in litigation between the Company and three
counterparties. The Company has now settled with two counterparties, Fiserv Securities, Inc. and Wedbush Morgan Securities, in 2003 and
and the third counterparty, Nomura Securities, Inc. and certain of its affiliates (“Nomura”) in a lawsuit pending in the United States District
Court for the District of Minnesota. In that action, Nomura is seeking approximately $10.0 million in damages and has asserted the right to
keep an additional $5.0 million, plus interest, unspecified punitive damages, attorney’s fees, and other relief from the Company for conversion
and breach of contract. Further, the Company has asserted claims and defenses against Nomura relating to the same amount and alleges, inter
alia
, that the defendants, which included Deutsche Bank AG, its affiliates and Nomura, among others, participated in a stock lending fraud and
2003, E*TRADE Securities and the Deutsche Bank entities and a former employee of Deutsche Bank entered into an agreement to settle the
allegations with no admission of liability by the Deutsche defendants. Pursuant to that agreement, the Deutsche defendants, in exchange for
certain monetary and other commitments, have been dismissed from the Company’s claims described above, and the parties are in the process
of documenting mutual releases. The case remains pending with respect to all other defendants, including Nomura and its affiliates.
Depositions in this matter have commenced. At this time, we are unable to predict the ultimate outcome of this dispute in relation to the parties
with which we have not settled. However, the ultimate resolution of this litigation may be material to the Company’s operating results or cash
flows for any particular period. The Company believes that its current reserves are adequate in view of its assessment of exposure at this time.
In April 2002, a putative class action was filed in the Superior Court of California and for the County of Orange entitled, “
Lisa Arroyo, et
al., v. E*TRADE Financial, et al. alleging that E*TRADE Mortgage misclassified certain classes of employees as “exempt,” rather than as
“non-exempt” employees. The Company agreed to a proposed settlement and established a reserve under the terms of which the Company
received an unconditional general release from all participating class members and in exchange paid a total of approximately $7.2 million
(including payroll taxes and withholdings). Plaintiffs dismissed this action against the Company with prejudice on January 14, 2004.
Except as to matters that we have reported as settled or tentatively settled, we intend to defend vigorously against the foregoing claims.
An unfavorable outcome in any matter that is not covered by insurance could have a material adverse effect on our business, financial
condition, results of operations and cash flows. In addition, even if the ultimate outcomes are resolved in our favor, the defense of such
litigation could entail considerable cost and the diversion of the efforts of management, either of which could have a material adverse effect on
the normal course of business, which we believe will not have a material adverse effect on our financial position, results of operations or cash
flows.
Regulatory Matters
The securities and banking industries are subject to extensive regulation under Federal, state and applicable international laws. As a
result, the Company is required to comply with many complex laws and rules and its ability to so comply is dependent in large part upon the
establishment and maintenance of a qualified compliance system. From time to time, the Company has been threatened with, or named as a
defendant in, lawsuits, arbitrations and administrative claims involving securities, banking and other matters. The Company is also subject to
periodic regulatory audits and inspections. Compliance and trading problems that are reported to
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