News

E*Trade drawn into GenesisIntermedia dispute

April 2, 2002

LOS ANGELES -- Electronic brokerage and financial transactions firm E*Trade Group Inc. (NYSE:ET) has been sued by three brokerage houses for loaning them shares of former shopping mall Internet kiosk operator GenesisIntermedia Inc. GenesisIntermedia was the subject of a NASDAQ investigation last fall and recently informed the Securities and Exchange Commission (SEC) it would be late filing its year-end report.

Nomura Securities Inc., Wedbush Morgan Securities, and Fiserv Securities Inc. have sued E*Trade for $60 million, according to the Los Angeles Times. The firms allege that E*Trade never returned cash that was given to the company in exchange for shares in GenesisIntermedia.

The suit against E*Trade stems from the stock practice of shorting. Short traders borrow shares of a stock and sell the shares, gambling that the share price will go down before they are required to repurchase the stock and return it to the lender.

In this case, E*Trade borrowed the shares from MJK Clearing Inc., then re-lent the shares to the investment firms for $60 million. When NASDAQ halted trading on Sept. 25, the companies were unable to return the shares. E*Trade last year recommended that the three brokerage firms seek repayment of the $60 million from MJK, but MJK filed for bankruptcy on Feb. 11, according to the Los Angeles Times.

GenesisIntermedia stock reached a high of $25 last June. But NASDAQ launched an investigation into charges the company made hidden payments to stock promoters who hyped the stock, and the role of Saudi businessman and Iran-Contra figure Adnan Khashoggi in the company. Khashoggi-controlled Ultimate Holdings Ltd. was a major shareholder in the company.

The company's Centerlinq division offered Internet/e-mail kiosks at more than 30 shopping malls nationally before the division was liquidated last fall. GenesisIntermedia in its third-quarter report last fall recognized a loss of $18,849,423 when it closed down the division (See story:GenesisIntermedia announces third-quarter results).

On April 1, GenesisIntermedia informed the SEC it would file its year-end report late. The company said it would file within 15 days of the late report.

"The company was unable to complete certain information critical to filing a timely and accurate report on the internal financial aspects of the company," the company stated to the SEC.