eTrade 2006 Annual Report Download - page 136

NOTE 25—COMMITMENTS, CONTINGENCIES AND OTHER REGULATORY MATTERS
Legal Matters
Litigation Matters
In June 2002, the Company acquired from MarketXT Holdings, Inc. (formerly known as “Tradescape
Corporation”) the following entities: Tradescape Securities, LLC; Tradescape Technologies, LLC; and
Momentum Securities, LLC. Disputes subsequently arose between the parties regarding the responsibility for
liabilities that first became known to the Company after the sale. On April 8, 2004, MarketXT filed a complaint
in the United States District Court for the Southern District of New York against the Company, certain of its
officers and directors, and other third parties, including SBI and Softbank Corporation, alleging that defendants
were preventing plaintiffs from obtaining certain contingent payments allegedly due, and as a result, claiming
damages of $1.5 billion. On April 9, 2004, the Company filed a complaint in the United States District Court for
the Southern District of New York against certain directors and officers of MarketXT seeking declaratory relief
and unspecified monetary damages for defendants’ fraud in connection with the 2002 sale, including, but not
limited to, having presented the Company with fraudulent financial statements regarding the condition of
Momentum Securities, LLC during the due diligence process. Subsequently, MarketXT was placed into
bankruptcy, and the Company filed an adversary proceeding against MarketXT and others in January 2005,
seeking declaratory relief, compensatory and punitive damages, in those Chapter 11 bankruptcy proceedings in
the United States Bankruptcy Court for the Southern District of New York entitled, “In re MarketXT Holdings
Corp., Debtor.” In that same court, the Company filed a separate adversary proceeding against Omar Amanat in
those Chapter 7 bankruptcy proceedings entitled, “In re Amanat, Omar Shariff.” In October 2005, MarketXT
answered the Company’s adversary proceeding and asserted its counterclaims, subsequently amending its claims
in 2006 to add a $326 million claim for “promissory estoppel” in which MarketXT alleged, for the first time, that
the Company breached a prior promise to purchase the acquired entities in 1999-2000. In April 2006, Omar
Amanat answered the Company’s separate adversary proceeding against him and asserted his counterclaims. In
separate motions before the Bankruptcy Court, the Company has moved to dismiss certain counterclaims brought
by MarketXT including those described above, as well as certain counterclaims brought by Mr. Amanat. In a
ruling dated September 29, 2006, the Bankruptcy Court in the MarketXT case granted the Company’s motion to
dismiss four of the six bases upon which MarketXT asserts its fraud claims against the Company; its conversion
claim; and its demand for punitive damages. In the same ruling, the Bankruptcy Court denied in its entirety
MarketXT’s competing motion to dismiss the Company’s claims against it. On October 26, 2006, the Bankruptcy
Court subsequently dismissed MarketXT’s “promissory estoppel” claim. The Company continues to believe that
the respective claims brought against it by MarketXT and Omar Amanat are without merit, and the Company will
continue both to vigorously defend itself against all such claims and to fully pursue its own claims and damages
as described above.
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 or cash flows. In addition, even if the ultimate
outcomes are resolved in our favor, the defense of such litigation could entail considerable cost or the diversion
of the efforts of management, either of which could have a material adverse effect on our results of operation. 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 which could have a material adverse effect on our financial position, results of
operations or cash flows. The Company contests liability or the amount of claimed damages in each pending
matter. 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 cannot predict with certainty the loss or range of loss related to such matters, how such
matters will be resolved, when they will ultimately be resolved, or what any eventual settlement, fine, penalty or
other relief might be. Subject to the foregoing, the Company believes that the outcome of any such pending
matter will not have a material adverse effect on the consolidated financial condition of the Company, although
the outcome could be material to the Company’s or a business segment’s operating results in the future,
depending, among other things, upon the Company’s or business segment’s income for such period.
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