Download E*Trade Financial Corp. Securities Litigation PDF

TitleE*Trade Financial Corp. Securities Litigation
LanguageEnglish
File Size9.7 MB
Total Pages210
Document Text Contents
Page 1

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

)
) Civil Action No

E*TRADE FINANCIAL CORP. ) 07 Civ. 8538 (RWS)

SECURITIES LITIGATION )
CONSOLIDATED AMENDED CLASS

)
ACTION COMPLAINT FOR

)
) VIOLATIONS OF THE FEDERAL
) SECURITIES LAWS

)
) JURY TRIAL DEMANDED

)

1. Plaintiffs Kristen Management Limited, Straxton Properties, Inc., and Javed Fiyaz

(sometimes referred to as the "Kristen-Straxton Group"), plaintiff Ira Newman and additional

plaintiffs Peter Farah and Andrea Frascaroli (collectively "Plaintiffs") bring this Consolidated

Amended Class Action Complaint for Violations of the Federal Securities Laws (the

"Complaint") individually and on behalf of all other purchasers of the securities of E*TRADE

Financial Corporation (together with its subsidiaries, "E*TRADE" or the "Company") between

April 19, 2006 and November 9, 2007, inclusive (the "Class Period"). Such purchasers, along

with Plaintiffs, are collectively referred to herein as the "Class." This Complaint is brought

against E*TRADE and the Company's Chief Executive Officer ("CEO"), Mitchell H. Caplan

("Caplan"), Chief Financial Officer ("CFO") and Principal Accounting Officer, Robert J.

Simmons ("Simmons"), and E*TRADE's Capital Markets Division President and the head of

E*TRADE Global Asset Management, Inc. ("EGAM"), Dennis Webb ("Webb") (collectively

the "Individual Defendants," and with the Company, "Defendants").

2. This Complaint is alleged upon personal knowledge as to Plaintiffs' own acts, and

upon information and belief as to all other matters, based upon Plaintiffs' counsel's

Page 2

investigation, including review of E*TRADE's public filings with the United States Securities

and Exchange Commission ("SEC"); wire and press releases published by and regarding

E*TRADE; securities analysts' reports and advisories; information available in the media and on

the Internet; and interviews of knowledgeable personas, including more than thirty former

E*TRADE employees (generally the "Confidential Witnesses" or specifically "CW _"). The

allegations of this Complaint include, inter alia, information from the following Confidential

Witnesses, who held the positions listed below at E*TRADE, that provided them with personal

access to the information which they reported:

Dates worked at
CW # Position E*TRADE Source or type of information

High level executive in Several years prior Witnessed purchase of highly risky
CW1 Correspondent Lending, to the Class Period loans, lax risk mitigation, lack of due

Wholesale Lending and through diligence and risk management
Credit approximately June following 2004 downsizing.

2006
Senior executive in Retail February. 2006 Hired in February 2006 to fix lending

CW2 Sales through several losses by increasing organic loans to
months after the balance risk Webb was taking on, but
Class Period ended saw that such increases could not

make a dent in losses. CW2 told
defendant Caplan market was turning
down when CW2 was hired.
Witnessed little or no due diligence
on purchased loans, and purchase of
very high risk loans (at least 50%
risky subprime). Observed the
understaffed overworked due
diligence dept that only reviewed I%
of purchased loans.

Mortgage Processing October 2006 — Regularly saw constant overvalued
CW3 Division manager February 2007 properties and appraisals, costly loan

closing problems.
Acquisitions manager, Several years prior Witnessed operations and IT. Saw

CW4 loan audit manager and to the Class Period that only a small percentage of loans
acting deal manager through mid-May were checked in portfolios where all

2007 loans were risky; junk loans, data and
reporting errors. Attended meetings
with defendant Webb where CW4

2

Page 105

where the Company could see how the borrowers were performing (and statements

regarding conservatism and lack of deterioration, etc.) were materially false and

misleading because, inter alia, in fact, E*TRADE performed no or insufficient due

diligence on such loans to see how the borrowers were performing; only 1% of purchased

loans were reviewed. (CW2), property appraisals were constantly grossly overstated,

substantially increasing the riskiness of the loan portfolio (CW3), experienced

conservative brokers were terminated at the same time Defendants increased

E*TRADE's purchase of risky loans with insufficient information (CW1), and Webb was

buying pools comprised of at least 50% risky, subprime loans while the due diligence

staff was too overworked and understaffed to review and verify most of the purchased

loans (CW2, CW6) and every loan reviewed in certain loan samples was risky - but

Defendants nonetheless refused to review or return to the originators the entire loan pools

related to these risky samples (CW4);

d. The partial statements regarding the Company's loan originators were

false and misleading because Defendants failed to disclose the identities of its other

troubled loan originators and amounts originated by them which were in E*TRADE's

portfolio, and failed to disclose the enormous size or proportion of National City's

originations for E*TRADE's loan portfolio (which was in fact close to 50% of

E*TRADE's portfolio);

e. The statements about the Company's highly positive guidance were

materially false and misleading for all the reasons stated herein and because over seven

months prior to Defendants' July 2007 statements (in early December 2006), Caplan

internally told employees at a Virginia employee meeting that he expected profits to be

105

Page 106

down and to continue to go down for the next year. (CW 14);

f. Defendants statements about "strict discipline", etc. and specific

statements about its LTV and DTI ratios and "consistent high FICO scores" (including

statements that DTIs and LTVs were conservative and significantly better that the general

industry) were also false and misleading, because, as the Company admitted after the

close of the Class Period in its February 8, 2008 response letter to the SEC (confirming

the report of CW4), the Company merely reviewed a "sample" of purchased loans to

ensure compliance with the originator's guidelines and "minimum" credit criteria, some

originators required E*TRADE to purchase entire pools without exclusions, and the

Company did not track current CLTV/LTVs for the entire portfolio; and

g. E*TRADE's reported 2Q 2007 assets, net income and profits were

materially false and overstated because Defendants failed to record adequate loan loss

provisions and ABS and MBS impairment adjustments.

SEC Requests Additional Details Re2ardin2 E*TRADE's B00610=K

217. On July 26, 2007, the SEC issued a letter to E*TRADE requesting additional

information and clarification regarding some of the information contained in E*TRADE's 2006

10-K. The SEC letter requested, among other things, additional disclosures with respect to

E*TRADE's underwriting policies for all major types of loans as well as the underwriting

policies for those loans including, but not limited to, "loan-to-value ratios," "collateral

requirements," and "any changes in those policies":

Risk Management
Credit Risk Management, page 50

Please tell us and revise to disclose the underwriting policies for the major types
of loans that you originate (e.g. requirements for loan-to-value ratios, collateral
requirements, etc.) and whether there have been any changes in those policies

106

Page 209

9/28/07 5,000 $13.100
10/1107 5,000 $13.330
10/1/07 5,000 $13.250
10/1/07 5,000 $13.300
10/4/07 5,000 $12.990
10/4/07 5,000 $13.030

10/19/07 3,000 $10.840
11/9/07 1,000 $8.770

4 of 4

Page 210

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

)
) Civil Action No.

E*TRADE FINANCIAL CORP. ) 07 Civ. 8538 (RWS)

SECURITIES LITIGATION )
)

)

CERTIFICATE OF SERVICE

I hereby certify that on January 16, 2009, 1 electronically mailed a true and correct copy

of the Consolidated Amended Class Action Complaint for Violations of the Federal Securities

Laws, filed January 16, 2009 in the United States District Court for the Southern District of New

York, to the following defendants' counsel:

DAVIS POLK & WARDWELL
Dennis E. Glazer
Nancy B. Ludmerer
Andrew E. Krause
450 Lexington Avenue
New York, New York 10017
Telephone: (212) 450-4900
Email: [email protected]
Email: [email protected]
Email: [email protected]

Counsel.for Defendants
E*Trade Financial Corporation, Mitchell
H Caplan and Robert• .1. Simmons

Executed: January 16, 2009
New York, New York 7.f.e, jiZki.,

Eric C. Love
Legal Assistant/Not Admitted

BROWER PIVEN
A Professional Corporation

488 Madison Avenue
New York, New York 10022
Telephone: (212) 501-9000
Facsimile: (212) 501-0300

Similer Documents