Exhibit 10.40

E*TRADE Financial Corporation

Severance Agreement

This Severance Agreement (the “Agreement”) is made and entered into by and
between E*TRADE Financial Corporation (the “Company”) and Greg Framke
(“Employee”) as of November 14, 2007 (the “Effective Date”).

Section 1. Term of Agreement. This Agreement shall remain in effect for a period
of two years from the Effective Date, and will automatically renew for
additional one year periods unless either party provides at least ninety days’
prior written notice of termination of the Agreement; provided that in the event
of a Change in Control during the term of this Agreement, this Agreement may not
be terminated until 24 months following such Change in Control.

Section 2. At-Will Employment. Nothing in this Agreement shall change the
“at-will” nature of Employee’s employment.

Section 3. Termination Benefits.

(a) Eligibility for Severance Benefits. If Employee’s employment with the
Company is terminated without Cause (other than by reason of permanent and total
disability, within the meaning of the Company’s disability program, or death) or
by Employee for Good Reason, then Employee shall be entitled to the following
benefits, subject to his or her execution and non-revocation of a release
reasonably acceptable to the Company (the “Release”) within 30 days following
termination of employment and compliance with the other terms of this Agreement:

(i) a pro-rata share of Employee’s Target Bonus (as defined below) if, and only
to the extent that, the Company has met its target performance objectives for
the year to date, as determined in the Company’s discretion based on its bonus
accrual through the most recently completed month;

(ii) a lump sum payment equivalent to one times or, if such termination occurs
during a Change in Control Period, two times Employee’s annualized base salary
then in effect;

(iii) a lump sum payment equivalent to one times or, if such termination occurs
during a Change in Control Period, two times Employee’s target bonus under the
Company’s performance bonus plan in effect for the year in which the termination
occurs (“Target Bonus”);

(iv) reimbursement for the cost of medical coverage at a level equivalent to
that provided by the Company immediately prior to termination of employment,
through the earlier of; (A) 12 months or, if such termination occurs during a
Change in Control Period, 24 months following Employee’s termination of
employment, or (B) the time Employee begins alternative employment; provided
that (x) it shall be the obligation of Employee to inform the Company that new
employment has been obtained and (y) such reimbursement shall be made by the
Company subsidizing or reimbursing COBRA premiums or, if

--------------------------------------------------------------------------------

Employee is no longer eligible for COBRA continuation coverage, by a lump sum
payment based on the monthly premiums immediately prior to the expiration of
COBRA coverage; and

(v) if such termination occurs during a Change in Control Period, each Company
equity compensation grant (“Equity Grants”) held by Employee, to the extent then
outstanding, shall become fully vested and exercisable (and any forfeiture
provision shall lapse) in full as of the later of the date of Employee’s
termination of employment or the last day following Employee’s execution of the
Release on which Employee may revoke such Release under its terms and shall
remain exercisable in full until the first to occur of the expiration of a
period of three months following the date on which Employee’s employment
terminated or the expiration of the term of such Equity Grant.

The amount payable to Employee under subsections (1) through (iii), above, shall
be paid to Employee in a lump sum within 30 days following the later of
Employee’s termination of employment or the last day on which Employee may
revoke such Release under its terms. The amounts payable under subsection
(iv) shall be paid monthly during the reimbursement period, provided that
Employee has executed the Release and any revocation period has run. The
foregoing benefits shall be in addition to all compensation and benefits earned
and accrued through the date of Employee’s termination of employment payable
pursuant to applicable law or the Company’s benefit plans (other than severance
benefits under any other arrangement).

(b) Death or Disability. In the event that Employee’s employment terminates as a
result of his or her death or permanent and total disability (within the meaning
of the Company’s disability program):

(i) All Equity Grants held by Employee, to the extent then outstanding, shall
become fully vested and exercisable (and any forfeiture provision shall lapse)
in full as of the date of Employee’s death. The Equity Grants shall be
exercisable by the estate of Employee in accordance with the time periods and
procedures set forth in the Equity Grant agreement.

(ii) Employee (or Employee’s estate, as applicable) shall be entitled to a
pro-rata share of the Target Bonus (presuming performance meeting, but not
exceeding, target performance goals).

(c) Any Other Termination. If Employee is terminated in any circumstance not
described in clause (a) or (b), the Company and its affiliates will have no
obligations to Employee under this Agreement.

(d) Equity Grant Forfeiture on Termination for Cause. In consideration for the
Company entering this Agreement, Employee hereby agrees that if Employee’s
employment is terminated by the Company for Cause, any outstanding stock option
held by Employee shall terminate in its entirety and cease to be exercisable
immediately upon such termination of employment.

 

2

--------------------------------------------------------------------------------

(e) Section 409A. Notwithstanding anything to the contrary in this Agreement, if
Employee is determined by the Company’s Compensation Committee to be a
“specified employee” within the meaning of Section 409A of the Internal Revenue
Code, as amended (“Section 409A”) and the regulations thereunder, as of the date
of Employee’s “separation from service” as defined in Treasury Regulation
Section 1.409A-1(h) (or any successor regulation), and if any payments or
entitlements provided for in this Agreement constitute a “deferral of
compensation” within the meaning of Section 409A and therefore cannot be paid or
provided in the manner provided herein without subjecting Employee to additional
tax, interest or penalties under Section 409A, then any such payment and/or
entitlement which would have been payable during the first six months following
Employee’s “separation from service” shall instead be paid or provided to
Employee in a lump sum payment on the first business day immediately following
the six-month anniversary of Employee’s “separation from service”.

Section 4. Definitions. As used in this Agreement, the following terms shall
have the meanings indicated.

“Cause” means any of the following:

(i) Employee’s theft, dishonesty, willful misconduct, breach of fiduciary duty
for personal profit, or falsification of any employment or Company documents or
records;

(ii) Employee’s material failure to abide by the Company’s code of conduct or
other policies (including, without limitation, policies relating to
confidentiality and reasonable workplace conduct);

(iii) Employee’s unauthorized use misappropriation, destruction or diversion of
any tangible or intangible asset or corporate opportunity of the Company
(including, without limitation, Employee’s improper use or disclosure of the
Company’s confidential or proprietary information);

(iv) any intentional act by Employee which has a material detrimental effect on
the Company’s reputation or business;

(v) Employee’s repeated failure or inability to perform any reasonable assigned
duties after written notice from the Company of, and a reasonable opportunity to
cure, such failure or inability;

(vi) any material breach by Employee of any employment, service, non-disclosure,
non-competition, non-solicitation or other similar agreement between Employee
and the Company, which breach is not cured pursuant to the terms of such
agreement; or

(vii) Employee’s conviction (including any plea of guilty or nolo contendere) of
any criminal act involving fraud, dishonesty, misappropriation or moral
turpitude, or which impairs Employee’s ability to perform his or her duties with
the Company.

 

3

--------------------------------------------------------------------------------

“Change in Control” means the first of the following events to occur:

(i) (A) any “person” (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended) becomes the “beneficial owner” (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing more than fifty percent (50%) of the total combined
voting power represented by the Company’s then outstanding voting securities,
other than the acquisition of the Company’s Common Stock by a Company-sponsored
employee benefit plan or through the issuance of shares sold directly by the
Company to a single acquiror; or (B) any “person” (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended)
becomes the “beneficial owner” (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing less than
fifty percent (50%) of the total combined voting power represented by the
Company’s then outstanding voting securities, but in connection with the
person’s acquisition of securities the person acquires the right to terminate
the employment of all or a portion of the Company’s management team;

(ii) the consummation of a merger or consolidation to which the Company is a
party which results in the holders of the voting securities of the Company
outstanding immediately prior thereto failing to retain immediately after such
merger or consolidation direct or indirect beneficial ownership of more than
fifty percent (50%) of the total combined voting power of the securities
entitled to vote generally in the election of directors of the Company or the
surviving entity outstanding immediately after such merger or consolidation;

(iii) a change in the composition of the Company’s Board of Directors occurring
within a period of 12 consecutive months, as a result of which fewer than a
majority of the directors are Incumbent Directors;

(iv) effectiveness of an agreement for the sale, lease or disposition by the
Company of all or substantially all of the Company’s assets; or

(v) a liquidation or dissolution of the Company.

The Incumbent Directors shall have the right to determine whether multiple sales
or exchanges of the voting stock of the Company, which, in the aggregate, would
result in a Change in Control, are related, and its determination shall be
final, binding and conclusive.

“Change in Control Period” shall mean the period commencing on the date of a
Change in Control and ending on the two-year anniversary date of the
consummation of the Change in Control.

“Date of Termination” means the date of termination of Employee’s employment
with the Company.

“Exchange Act” means the Securities and Exchange Act of 1934, as amended.

 

4

--------------------------------------------------------------------------------

“Good Reason” shall mean any of the following conditions occurring without
Employee’s consent:

(i) a decrease in Employee’s total target cash compensation opportunity (adding
base salary and target bonus) of greater than 20%; or

(ii) material, adverse reduction in responsibilities such that Employee has no
substantial responsibilities; provided that, for the avoidance of doubt, a
change in title, demotion, change in responsibilities or chance in reporting
relationships (including type and number) shall not constitute “Good Reason”;

provided that Employee has provided the Company with prior written notification
of the grounds giving rise to such Good Reason and has terminated employment
within 30 days of the occurrence of such Good Reason.

“Incumbent Directors” shall mean members of the Company’s Board of Directors who
either (i) are members of such Board as of the date hereof, or (ii) are elected,
or nominated for election, to such Board with the affirmative vote of at least a
majority of the Incumbent Directors at the time of such election or nomination.

Section 5. Employee Covenants.

(a) Agreement Not To Compete: Return of Company Property. As a condition to
receipt of any benefits under this Agreement, Employee agrees that in the event
of his or her termination at any time and for any reason, he or she shall not
compete with the Company in any unfair manner, including, without limitation,
using any confidential or proprietary information of the Company to compete with
the Company in any way. Upon termination of employment for any reason, Employee
shall immediately deliver to the Company all documents, property, and other
records of the Company or any affiliate of the Company, and all copies thereof,
within Employee’s possession, custody or control, Further, as a condition to
receipt of any benefits under this Agreement, Employee agrees that for a period
of one year following the date of termination he or she will not accept
employment, or perform services as a consultant or independent contractor, for
any entity competing with the Company.

(b) Non-Solicitation. As a condition to receipt of any benefits under this
Agreement, Employee agrees that for a period of one year after the date of the
termination of his or her employment for any reason, he or she shall not, either
directly or indirectly, solicit the services, or attempt to solicit the
services, of any employee of the Company to any other person or entity.

(c) Non-Disparagement. During and following Employee’s employment, Employee
agrees that he shall be supportive of the Company’s efforts and shall not
disparage the Company or its officers, directors, employees, products or
services.

Section 6. Miscellaneous.

(a) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of New York.

 

5

--------------------------------------------------------------------------------

(b) Entire Agreement. This Agreement supersedes all prior negotiations,
representations or agreements, whether written or oral, concerning any rights to
severance pay and benefits. Any amounts payable hereunder shall be reduced by
any amounts paid in lieu of notice under the WARN Act or similar law.

(c) No Waiver. The failure of the Company or any Employee to insist upon strict
adherence to any term of this Agreement on any occasion shall not be considered
a waiver of such party’s rights or deprive such party of the right thereafter to
insist upon strict adherence to that term or any other term of this Agreement.

(d) Severability. In the event that any one or more of the provisions of this
Agreement shall be or become invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions of this
Agreement outstanding shall not be affected thereby.

(e) Dispute Resolution. In the event of any dispute or claim relating to or
arising out of this Agreement (including, but not limited to, any claims of
breach of contract, wrongful termination or age, sex, race or other
discrimination), Employee and the Company agree that all such disputes shall be
fully and finally resolved by binding arbitration conducted by the American
Arbitration Association in Arlington, Virginia in accordance with its National
Employment Dispute Resolution rules. Employee acknowledges that by accepting
this arbitration provision he or she is waiving any right to a jury trial in the
event of such dispute. In connection with any such arbitration, he Company and
Employee shall each pay one-half of the costs and expenses of the arbitration,
and each party shall bear its own respective attorneys’ fees and all other
costs, unless otherwise required or allowed by law and awarded by the
arbitrator.

(f) Successors. The provisions of this Agreement shall inure to the benefit of
and be binding upon the Company, Executive and each and all of their respective
heirs, legal representatives, successors and assigns. The duties,
responsibilities and obligations of Executive under this Agreement shall be
personal and not assignable or delegable by Executive in any manner whatsoever
to any person, corporation, partnership, firm, company, joint venture or other
entity. Executive may not assign, transfer, convey, mortgage, pledge or in any
other manner encumber the compensation or other benefits to be received by him
or any rights which he may have pursuant to the terms and provisions of this
Agreement.

(g) Withholding Taxes. The Company may withhold from any amounts payable under
this Agreement such U.S. federal, state and local taxes as may be required to be
withheld pursuant to any applicable law or regulation.

 

6

--------------------------------------------------------------------------------

IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective
Date.

 

E*TRADE Financial Corporation By:  

/s/ Mitchell H. Caplan

  Mitchell H. Caplan   Chief Executive Officer By:  

/s/ Greg Framke

  Greg Framke

 

7