E-Trade Sued Over GenesisIntermedia Stock Loans

E-Trade Group Inc. revealed that three brokerages are coming after it for money lost in the collapse of Van Nuys-based Genesis Intermedia Inc.

E-Trade said it has been sued by three brokerages seeking $60 million in connection with shares it loaned of GenesisIntermedia, 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 online brokerage last year in exchange for shares of GenesisIntermedia, E-Trade said in its annual 10K report filed with the Securities and Exchange Commission.

GenesisIntermedia was one of last year’s biggest stock flameouts, and the shares were involved in a flurry of transactions that helped contribute to the failure of a securities firm.

The stock price jumped from $6 at the start of the year to $25 by June, boosted in part by a recommendation from Rafi Khan, a Southland-based stock promoter who previously had been banned from the securities industry and in 1999 pleaded guilty to tax fraud.

The money-losing company attracted the interest of some investors for its shopping mall-based Internet-access kiosks.

On Sept. 25 trading in GenesisIntermedia was halted as the FBI and the Securities and Exchange Commission probed allegations of stock manipulation and whether the firm falsified its accounting reports.

The stock was delisted from Nasdaq in January, and has since traded in the over-the-counter market, where it was quoted at one-tenth of 1 cent Thursday.

Khashoggi’s Bermuda-based Ultimate Holdings Ltd. controlled 75% 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.

Ultimate Holdings was the only investor that controlled a block of stock that large, according to SEC filings. The firm has not commented on the stock’s fate.

Brokerages often lend stock to investors who want to engage in “short selling,” which involves borrowing shares and selling them, betting that the price will decline and that the borrowed shares can be replaced later for less.

A brokerage that needs such shares for a short-selling client borrows them from another brokerage in return for a cash loan of 100% of their value. As the price of the shares fluctuates, the firms engage in a process called marking the shares to market that is supposed to equalize the value of the shares and the money loaned.

Stock can be lent from one brokerage to another along a chain.

E-Trade lent GenesisIntermedia shares to the three brokerages after first borrowing the stock from MJK Clearing Inc., then a unit of Stockwalk Group Inc. Stockwalk filed for Chapter 11 bankruptcy protection 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 due MJK.

E-Trade, in its SEC filing, said it is “confident that E-Trade Securities has sufficient capital in excess of regulatory requirements to cover any potential exposure arising from these matters.”

E-Trade hasn’t established any reserves or taken any charges in connection with the lawsuits, said Connie Dotson, the Menlo Park, Calif.-based brokerage’s chief communications officer.

E-Trade shares fell 24 cents to $9.18 on the New York Stock Exchange.