E*Trade Discloses Goodwill Charge, Lawsuit

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E*Trade

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expects to record a $300 million to $350 million charge in the first quarter to write down the value of acquisitions.

The company also said in its 10-K filing with the SEC that CEO Christopher Cotsakos and the board were named in a shareholder lawsuit after E*Trade agreed to forgo payment on a $15 million loan to the executive and reimburse him for $15.2 million in related taxes. The forbearance was granted in exchange for the waiver of certain benefits included in his employment contract.

E*Trade shares were lately falling 2.76% to $9.16 amid a larger wave of selling in the financial sector.

The lawsuit against Cotsakos and the E*Trade board, filed on Dec. 28, 2001, and amended on Feb. 26 of this year, alleges a "breach of fiduciary duties, waste of corporate assets, abuse of control and gross mismanagement" for the company's settlement of the loan agreement, the board's approval of other loans to officers and directors, and the company's failure to fully disclose these things in previous filings.

Ultimately, the total of $30.2 million is reflected as executive loan settlement under operating expenses for 2001, which totaled $389 mllion. E*Trade lost 73 cents a share in 2001 versus a 6 cent profit in 2000. On a pro forma basis, the company lost 95 cents a share last year and lost 36 cents the previous year.

"In connection with the renegotiation of our employment contract with our chairman of the board and chief executive officer and as part of other contractual renegotiations undertaken by the Company, in August 2001 we cancelled a $15.0 million note receivable and agreed to reimburse $15.2 million in related taxes in return for the elimination of certain benefits contained in our chief executive officer's employment agreement. This action had the effect of eliminating the Company's contractual obligations to cancel the note and reimburse related taxes in the event of a change of control of the Company. The total of $30.2 million is reflected as executive loan settlement in the consolidated statement of operations," the company wrote.

In its filing, E*Trade says it believes the allegations are "without merit," and that it intends to "defend against them vigorously," but added that an unfavorable decision that is not covered by insurance could hurt its profits.

The first quarter charge is the result of the change in accounting for goodwill that took effect on Jan. 1 and covers mostly international acquisitions. Under the new regulations, companies can stop taking regular charges on their quarterly earnings to amortize goodwill, or pay down the value of assets bought at prices above fair value. Only if a company determines that its assets have fallen in value will it have to write down the difference.

When the rule took effect, E*Trade stopped amortizing goodwill with an estimated value of $417.6 million, the company says in its filing. E*Trade has bought more than a dozen companies over the past several years, including market making specialist Dempsey and online brokerage firm WebStreet, as well as Private Accounts, an account management service, Telebank and LoansDirect.

Last year, E*Trade wrote down $6.4 million in goodwill.