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 Dec. 22 (Larry Freudenberg v. E*TRADE Financial Corporation, et al., No. 07 Civ. 8538, S.D. N.Y.).
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.
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.
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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