Caution urged as online stock scams multiply Regulators notice more fraud in recent months; companies' bottom lines hit PrintE-mailDisable live quotesRSSDigg itDel.icio.usBy Robert Schroeder, MarketWatch Last Update: 6:00 PM ET Oct 27, 2006
WASHINGTON (MarketWatch) -- A growing wave of high-tech fraud is starting to add up to real losses in the online brokerage business, and sending clear warning signals to investors that they need to protect themselves from cyber-thieves after their cash. Last week, E-Trade Financial Corp. said Internet fraud-related scams cost the company $18 million in the third quarter. And earlier this week, TD Ameritrade said fraud cost it $4 million in its fourth quarter. It's the first time either company has disclosed dollar amounts for fraud losses. The disclosures painfully illustrate a burgeoning cost of doing business in the multibillion dollar online investing industry. For brokers-- who promise to make defrauded investors whole -- losses represent wasted assets. For shareholders, they mean a decline in profits. And for customers--10.2 million of whom have traded in the last three months--it's a heart-thumping threat to their savings. And no one expects this type of fraud to stop anytime soon. "I think this is with us forever," says TD Ameritrade CEO Joe Moglia, adding that online brokers are treating fraud-fighting as a real priority. "You never become complacent."
Proliferating scams Regulators say they have seen a particularly strong upswing in theft resulting from two types of scams in the last two months. Both frauds involve thieves snaring investors' user names and passwords from public computers in places like hotel lobbies or Internet cafes by using keystroke-monitoring "spyware" to grab the information, according to John Reed Stark, the head of the SEC's Office of Internet Enforcement. One scam involves thieves armed with users' private information liquidating securities and wiring the money to bank accounts, often offshore. Stark calls the second scam "pump and dump--with a technological twist to it." Again using victims' personal data, hackers steal money to purchase microcap stocks in an effort to drive up their share prices. The shares--already owned by the hackers--are then sold at a profit. Stark said regulators have "several investigations" ongoing into online investing-related fraud. How to protect yourself Consumers can be their own first line of defense from fraudsters. All online brokers provide extensive tips to customers on their web sites. The most common security tips are keeping account information secure, frequently changing user IDs and passwords and using firewalls and other security software on home computers. Ameritrade (AMTD : td ameritrade hldg corp com News , chart, profile, more Last: 16.39+0.01+0.06%
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Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: AMTD16.39, +0.01, +0.1%) also gives its clients security software and E-Trade (ET : e trade financial corp com News , chart, profile, more Last: 23.62-0.21-0.88%
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Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: ET23.62, -0.21, -0.9%) gives its customers discounts on Symantec security products. Investors are also being urged to take precautions if they're logging on and trading while in foreign countries. "This seems to be something happening overseas. People are traveling and allowing their log-ins and their user IDs to be obtained. It mostly seems to be through wireless systems," TD Ameritrade Chief Operating Officer Randy MacDonald said on a conference call this week. Whether overseas or domestically, companies and regulators say, customers should avoid using computers in places like hotels or libraries. "If they're using public computers, they should think twice about that," says Glen Mathison, a spokesman for Charles Schwab & Co., Inc. (SCHW : Charles Schwab & Co., Inc. News , chart, profile, more Last: 17.76-0.05-0.28%
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Delayed quote dataAdd to portfolio Analyst Create alertInsider Discuss Financials Sponsored by: SCHW17.76, -0.05, -0.3%) . The SEC and securities administrators recommend similar steps. Read an SEC online-safety guide. "Investors need to carefully guard their financial information and continuously monitor their online brokerage records to ensure that they are not subject to this type of fraud," said North American Securities Administrators Association President Joseph Borg in an alert to investors Thursday. Beefing up security At the same time they're warning customers to protect themselves, online brokerage companies are also investing in new technologies to fight fraud, though they're reluctant to discuss specific investments or methods.
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