E TRADE Financial Corp (ETFC)

[eastunder]

UPDATE 1-Subprime lawsuit v E*Trade may proceed - US judge
Tue May 11, 2010 5:26pm EDTStocks
E TRADE Financial Corporation

* Judge orders online broker to defend suit

* Investors sued over subprime mortgages in 2007

NEW YORK, May 11 (Reuters) - Investors may proceed with a class action lawsuit against online broker E*Trade Financial Corp (ETFC.O) over allegations of securities fraud in the collapsed subprime mortgage market, a U.S. judge ruled on Tuesday.

E*Trade, which was sued in 2007 in U.S. District Court in New York, had sought dismissal of the complaint on the grounds that losses incurred were caused by a "worldwide economic catastrophe" and that the corporation did not break the law.

The complaint said that E*Trade Chief Executive Officer Mitchell Caplan, Chief Financial Officer Robert Simmons and President Dennis Webb misrepresented the company's financial condition.

Class action suitors also said the defendants "knowingly and/or recklessly purchased high-risk loan pools and asset-backed securities with inadequate due diligence" while assuring investors they were safe.

"Plaintiffs have sufficiently pled that defendants had present knowledge of the risk, and have not merely pled fraud-by-hindsight," Judge Robert Sweet said in a written ruling. "Because plaintiffs allege that defendants intentionally misled the public, rather than simply making bad business decisions, plaintiffs have pled more than mere mismanagement."

A spokeswoman for E*Trade could not immediately be reached for comment.

According to court documents, E*Trade admitted that its exposure to risky asset-backed securities, pools of mortgages known as collateralized debt obligations and second-lien securities was about $450 million.

The judge's ruling also said the investors had shown in their lawsuit that E*Trade's share price fell significantly -- 58.67 percent in one day -- after the company's risky investments and losses were revealed.

The case is Larry Freudenberg v E*Trade Financial Corporation et al, U.S. District Court for the Southern District of New York, No. 07-8538. (Reporting by Grant McCool; Editing by Richard Chang)