eTrade 2012 Annual Report Download - page 25

ITEM 3. LEGAL PROCEEDINGS
On October 27, 2000, Ajaxo, Inc. (“Ajaxo”) filed a complaint in the Superior Court for the State of
California, County of Santa Clara. Ajaxo sought damages and certain non-monetary relief for the Company’s
alleged breach of a non-disclosure agreement with Ajaxo pertaining to certain wireless technology that Ajaxo
offered the Company as well as damages and other relief against the Company for their alleged misappropriation
of Ajaxo’s trade secrets. Following a jury trial, a judgment was entered in 2003 in favor of Ajaxo against the
Company for $1.3 million for breach of the Ajaxo non-disclosure agreement. Although the jury found in favor of
Ajaxo on its claim against the Company for misappropriation of trade secrets, the trial court subsequently denied
Ajaxo’s requests for additional damages and relief. On December 21, 2005, the California Court of Appeal
affirmed the above-described award against the Company for breach of the nondisclosure agreement but
remanded the case to the trial court for the limited purpose of determining what, if any, additional damages
Ajaxo may be entitled to as a result of the jury’s previous finding in favor of Ajaxo on its claim against the
Company for misappropriation of trade secrets. Although the Company paid Ajaxo the full amount due on the
above-described judgment, the case was remanded back to the trial court, and on May 30, 2008, a jury returned a
verdict in favor of the Company denying all claims raised and demands for damages against the Company.
Following the trial court’s filing of entry of judgment in favor of the Company on September 5, 2008, Ajaxo filed
post-trial motions for vacating this entry of judgment and requesting a new trial. By order dated November 4,
2008, the trial court denied these motions. On December 2, 2008, Ajaxo filed a notice of appeal with the Court of
Appeal of the State of California for the Sixth District. Oral argument on the appeal was heard on July 15, 2010.
On August 30, 2010, the Court of Appeal affirmed the trial court’s verdict in part and reversed the verdict in part,
remanding the case. The Company petitioned the Supreme Court of California for review of the Court of Appeal
decision. On December 16, 2010, the California Supreme Court denied the Company’s petition for review and
remanded for further proceedings to the trial court. On September 20, 2011, the trial court granted limited
discovery at a conference on November 4, 2011. The testimonial phase of the third trial in this matter
commenced on February 21 and 22, 2012 and concluded on June 12, 2012. The parties await decision on whether
there will be a second phase of this bench trial. The Company will continue to defend itself vigorously.
On October 2, 2007, 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 and its then Chief
Executive Officer and Chief Financial Officer, Mitchell H. Caplan and Robert J. Simmons, respectively, by Larry
Freudenberg on his own behalf and on behalf of others similarly situated (the “Freudenberg Action”). On July 17,
2008, the trial court consolidated this action with four other purported class actions, all of which were filed in the
United States District Court for the Southern District of New York and which were based on the same facts and
circumstances. On January 16, 2009, plaintiffs served their consolidated amended class action complaint in
which they also named Dennis Webb, the Company’s former Capital Markets Division President, as a defendant.
Plaintiffs contended, among other things, that the value of the Company’s stock between April 19, 2006 and
November 9, 2007 was artificially inflated because the defendants issued materially false and misleading
statements and failed to disclose that the Company was experiencing a rise in delinquency rates in its mortgage
and home equity portfolios; failed to timely record an impairment on its mortgage and home equity portfolios;
materially overvalued its securities portfolio, which included assets backed by mortgages; and based on the
foregoing, lacked a reasonable basis for the positive statements made about the Company’s earnings and
prospects. The parties entered into a Stipulation of Settlement on May 17, 2012, which was submitted to the
Court for approval. The settlement was approved by the Court and the class was certified by a final judgment and
order of dismissal dated October 22, 2012. Under the terms of the settlement, the Company and its insurance
carriers paid $79.0 million in return for full releases. Approximately $11.0 million of the total settlement figure
was paid by the Company, which was expensed in the year ended December 31, 2011. As of January 14, 2013,
all appeals and requests for attorneys’ fees have been resolved and the settlement is final.
On October 17, 2007, the SEC initiated an informal inquiry into matters related to the Company’s mortgage
loan and mortgage-related securities investment portfolios. The Company is cooperating fully with the SEC in
this matter.
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