Yesterday, New York-based online brokerage firm E*TRADE Financial Corporation (ETFC”>ETFC) and its insurers entered into an agreement to settle the allegations against the company and some of its former executives filed in 2007, according to the regulatory filing. The agreement awaits court approval, which is expected in the first quarter of 2012.
E*TRADE agreed to pay $10.75 million out of total settlement of $79 million, with the balance being paid by the insurers. The company will reflect the payment as a part of total expenses in the fourth quarter of 2011.
Four years ago, investors filed the lawsuits against E*TRADE in the United States District Court for the Southern District of New York. The complaint lodged claims that the company sullied securities law after incurring heavy losses in its mortgage and home-equity loan portfolios. Moreover, investors alleged the company for violating fiduciary duty to shareholders related to the losses experienced at the time of downturn in the subprime mortgage market.
Investors who filed lawsuits include shareholders, who bought E*TRADE’s shares between April 19, 2006 and November 9, 2007. Shareholders alleged that the company and its executives issued misleading and untrue statements and created inflated stock prices during that period.
Moreover, the company and its executives concealed the risks associated with the portfolios and did not disclose to investors the rise in delinquency rates in mortgage and home equity portfolios. The complaint lodged includes several other allegations associated with the company's mortgage portfolio.
The defendants in the lawsuit includes ex-Chief Executive Mitchell Caplan and former Chief Financial Officer Robert Simmons of E*TRADE. Furthermore, Dennis Webb, E*TRADE’s former Capital Markets Division President was also named as a defendant in 2009. The defendants, however, deny any wrongdoings on their part.
Recently, one of the mega banks in the U.S., Citigroup Inc.’s (C) settlement deal with the US Securities and Exchange Commission (SEC) got messy. The SEC is appealing against a federal judge’s decision to reject its $285 million settlement of securities fraud charges with Citi.
The SEC has alleged Citi of misleading investors while selling a $1 billion fund in 2006 and 2007 that was invested in mortgage-related securities. Citi was accused of not letting investors know that it was betting against many of the assets. Incidentally, Citi neither admitted nor denied wrongdoing.
Therefore, with the settlement of the lawsuits, E*TRADE plans to move forward with its business strategies after ending all burdens related to the financial crisis. Moreover, a pending lawsuit creates financial troubles only, and therefore it is always beneficial to end all these matters as soon as possible. Further, the pending lawsuits and its ongoing always dent the company’s reputation and its financials, and the investors, who have lost their hard-earned money, also feel relieved after the settlement only.
Shares of E*TRADE currently retain a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we maintain a long-term “Neutral” recommendation on the stock.
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