NEW YORK - (Mealey's) E*TRADE Financial Corp. has agreed
to a $79 million settlement with investors to settle claims that it
misrepresented the risk associated with its investment in subprime
mortgage-backed securities in violation of federal securities laws, according
to a Securities and Exchange Commission Form 8-K filed by E*TRADE on Dec. 21 (Larry
Freudenberg v. E*TRADE Financial Corporation, et al., No. 07 Civ. 8538,
S.D.N.Y.; See May 2010, Page 17).
According to the SEC Form 8-K, $10.75 million of the
settlement, which is subject to court approval, will be paid by E*TRADE "in
return for full releases."
"The defendants continue to deny that they committed any
violations of law or breached any fiduciary duty to
shareholders. The Company's portion of the settlement payment will
be reflected as an expense in the fourth quarter of 2011. The
parties expect to enter into definitive agreements and seek court approval
during the first quarter of 2012," E*TRADE says.
The SEC Form 8-K is available online at www.sec.gov/Archives/edgar/data/1015780/000095010311005353/dp27832_8k.htm.
Misrepresentations
Investors sued E*TRADE, Chief Executive Officer Mitchell
H. Caplan, Chief Financial Officer Robert J. Simmons and Capital Markets
Division (known as EGAM) President Dennis E. Webb (collectively, E*TRADE),
contending that the defendants misrepresented the operation of EGAM, E*TRADE's
most profitable sector, and the company's financial condition in violation of
Section 10(b) of the Securities Exchange Act of 1934 and Securities and
Exchange Commission Rule 10b-5.
According to the investors, the defendants represented
that E*TRADE's mortgage business focused on "organic" loans, originating its
own mortgages for its "mass affluent" brokerage customers, but, instead, it was
purchasing large mortgage pools from subprime and below-subprime mortgage
originators. In addition, the investors contended that the defendants
failed to publicly disclose that they were disregarding E*TRADE's underwriting
practices and had changed E*TRADE's business model from conservative
investments in high-quality loans to purchasing extremely high-risk, facially
low-quality instruments.
On May 11, 2010, Judge Robert W. Sweet denied the
defendants' motion to dismiss the action, rejecting their contention that the
losses incurred were the result of a "worldwide economic catastrophe" and not
fraud.
Counsel
The investors are represented by David A.P. Brower of
Brower Piven in New York and Eduard Korsinsky
of Levi & Korsinsky in New York.
E*TRADE is represented by Amelia T.R. Starr of Davis Polk
& Wardwell in New York.
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