E*Trade Says Lawsuits Seek $60 Mln Over GenesisIntermedia Loans
By David Evans
Menlo Park, California, April 1 (Bloomberg) -- E*Trade Group Inc. said it's been sued by three brokerages seeking $60 million in connection with shares it loaned of GenesisIntermedia Inc., a telemarketer controlled by Saudi arms dealer Adnan Khashoggi.
Nomura Securities Inc., Wedbush Morgan Securities, and Fiserv Securities Inc. allege that E*Trade never returned cash they gave the second-largest online brokerage last year in exchange for shares of GenesisIntermedia, E*Trade said in its 10K report filed with the Securities and Exchange Commission.
Trading in the shares was halted Sept. 25 as the Federal Bureau of Investigation and the Securities and Exchange Commission probed allegations of stock manipulation and whether GenesisIntermedia falsified its accounting reports.
The telemarketing firm, which trades for less than a penny, was at $5.90 before September's halt. The Van Nuys, California- based company's shares reached a high of $25 on June 29.
E*Trade ``is confident that E*Trade Securities has sufficient capital in excess of regulatory requirements to cover any potential exposure arising from these matters,'' the company said in its filing.
E*Trade hasn't established any reserves or taken any charges in connection with the lawsuits, said Connie Dotson, E*Trade's chief communications and knowledge officer.
Khashoggi's Bermuda-based Ultimate Holdings Ltd. controlled 75 percent of GenesisIntermedia's stock when a person, still unidentified, used 7.2 million shares as collateral in a chain of defaulted loans that reached an estimated $125 million.
Khashoggi's Firm
Ultimate Holdings, which was not available for comment, was the only investor that controlled a block that large, according to SEC filings.
Brokerage firms often lend stock to investors who want to engage in short selling, a strategy that profits when the price of the underlying shares declines.
A firm that needs such shares borrows them in return for a cash loan of 100 percent of their value. As the price of the shares fluctuates, the firms engage in a process called marking the shares to market that equalizes the value of the shares and the money loaned.
If the shares rise, the stock borrower gives the cash appreciation to the stock lender, and the loan grows. If the shares fall, the stock lender is required to return the amount of the cash loss, and the loan shrinks. Stock can be lent from one brokerage firm to another along a chain.
Chain of Defaults
E*Trade lent GenesisIntermedia shares to the three brokerage firms after first borrowing the stock from MJK Clearing Inc., then a unit of Stockwalk Group Inc. Stockwalk filed for Chapter 11 bankruptcy protection on Feb. 11.
MJK ran out of cash after repaying $60 million, which became due after GenesisIntermedia's trading halt. Native Nations Securities Inc., which loaned MJK the 7.2 million shares, defaulted on a related $60 million payment that was due to MJK.
Separately, E*Trade said in its SEC filing that it would take a charge of $300 million to $350 million to account for its international acquisitions. The charge is being recorded now because of a change in accounting rules that prevents the company from amortizing the cost of acquisitions over time. |
