Organized Crime Steals Millions From Online Brokers

The feds are investigating fraudulent activities that have cost brokers and their clients millions, forcing one company to take a one-time charge of $18 million.

Last week during a conference call with financial analysts, New York-based E*Trade noted that it had taken a one-time charge of $18 million due to online fraud.

"We have experienced a serious increase in fraud relating to identity theft," said Mitchell Caplan, E*Trade's chief executive, in the earnings call last Wednesday. That fraud, said Caplan, has been traced to a "concerted ring in Eastern Europe and Thailand," but new processes and technology had nearly eliminated the fraud. "In the last three weeks, we've seen that level of fraud drop to almost zero," Caplan claimed. Both the FBI and the Securities and Exchange Commission (SEC) are looking into the fraud, he said.

According to reports by Bloomberg News, Omaha, Neb.-based TD Ameritrade has also been hit by fraudsters out of Europe and Asia.

The criminals are using a number of profitable techniques, said Ameritrade and other sources quoted by Bloomberg, including a "pump-and-dump" scheme where thieves used customers' funds to drive up the prices of marginal stocks. The criminals would then sell shares they had purchased earlier for a large profit. The scheme typically sets off few or no security alerts at online brokers because no money is withdrawn from the compromised accounts, Bloomberg said. In other ploys, identity thieves open accounts using stolen names, then use those accounts for illegal trading or money laundering. Any investigation leads authorities to the victim, who appears to be responsible.

Customer fraud losses were made good by E*Trade and TD Ameritrade, both of which announced earlier this year that they would reimburse customers. Federal law does not require brokers to refund customers.

E*Trade has also aggressively pushed two-factor authentication tokens to customers. The tokens, which use RSA's SecurID authentication technology, are about the size of a flash drive, and generate codes that change every few seconds. Customers use the code, along with the usual username and password, to access accounts.

On the conference call with investors, Caplan said customers who used the tokens hadn't been touched by the Eastern European or Asian fraud gangs. "But not everyone has them, and when they have them, not everyone chooses to use them," he said. Some or all of E*Trade's $18 million loss may be covered by insurance, Caplan added, although he declined to give details.

TechWeb News
Oct 24, 2006 02:14 PM