eTrade 2008 Annual Report Download - page 150

On April 2, 2008, a class action complaint alleging violations of the federal securities laws was filed in the
United States District Court for the Southern District of New York against the Company entitled, “John W.
Oughtred, Individually, and on Behalf of all Others Similarly Situated, Plaintiff, v. E*TRADE Financial
Corporation and E*TRADE Securities, LLC, Defendants.” Plaintiff contends, among other things, that the
Company committed various sales practice violations in the sale of certain auction rate securities to investors
between April 2, 2003, and February 13, 2008 (the “class period”) by allegedly misrepresenting that these
securities were highly liquid and safe investments for short term investing. On April 17, 2008, the trial court
entered an order relieving the Company of its obligation to move, answer or otherwise respond to the complaint
until such time as the court may deem appropriate. Thereafter, plaintiff Oughtred joined plaintiffs in twelve other
actions involving auction rate securities (in which the Company is not named as defendant) in filing a motion
seeking to centralize all 13 actions in the Southern District of New York or in the alternative, the Northern
District of California. By order filed October 9, 2008, a United States Judicial Panel on Multi-District Litigation
denied plaintiffs’ motion to transfer, and on December 18, 2008, Plaintiff filed his first amended class action
complaint. The Company intends to vigorously defend itself against the claims raised in this complaint.
On October 11, 2006, a state class action entitled, “Nikki Greenberg, and all those similarly situated,
plaintiffs, versus E*TRADE FINANCIAL Corporation, defendant” was filed in the Superior Court for the State
of California, County of Los Angeles on behalf of all customers or consumers who allegedly made or received
telephone calls from E*TRADE that were recorded without their knowledge or consent following a telephone
call from plaintiff Greenberg to the Company’s Beverly Hills financial center on August 8, 2006, that was
recorded during a brief period when the Company’s automated notice system was out of order. On February 7,
2008, class certification was granted and the class defined to consist of (1) all persons in California who received
telephone calls from E*TRADE and whose calls were recorded without their consent within three years of
October 11, 2006, and (2) all persons who made calls from California to the Beverly Hills financial center of the
Company on August 8, 2006. In the interim, the Company has filed motions seeking to de-certify or further limit
the defined class, and plaintiffs have filed competing motions seeking to expand it. The hearing of these motions,
formerly set for September 19, 2008, is now scheduled to take place on March 6, 2009. The Company has denied
the allegations of the complaint.
Representatives of various states attorneys general have made informal inquiries regarding the auction rate
securities held by the Company’s customers. The Company is cooperating with these inquiries, which are
continuing.
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 its financial position,
results of operations or cash flows. 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 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.
An unfavorable outcome in any matter that is not covered by insurance could have a material adverse effect
on the Company’s business, financial condition, results of operations or cash flows. In addition, even if the
ultimate outcomes are resolved in the Company’s 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 the
Company’s business, financial condition, results of operations or cash flows.
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