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Online Brokerages TD Waterhouse and E-Trade Most Recent Sources of Identity Theft

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I read today that over the past three months, oversees identity thieves broke into customer accounts at brokerages TD Waterhouse and E-Trade and participated in a stock-trading fraud scheme leading to $22 million in losses. Sophisticated oversees hackers were able to use keylogging programs to obtain private information and log onto customer accounts in order to participate in a “pump-and-dump” stock scheme.

Hacker criminals in this type of stock fraud scheme log into customer accounts and buy large amounts of shares in little known, low-trade-volume companies. These purchases in low-trade-volume companies often artificially drive up the price of the stock quickly. Once the price has artificially risen, these criminals sell quickly to maximize profit and arrange to have monies sent oversees. So far, these schemes have caused customers at TD Waterhouse to lose $4 million and customers at E-Trade Securities to lose $18 million.

If you trade on-line, do not use public computers to enter passwords. Also, monitor your brokerage account regularly to check for unauthorized trades. If you suspect fraud, brokerages should be made aware of your suspicions and should work with you to restore your losses. Brokerages bear a responsibility to make on-line customer trading effective and secure. In my opinion, if your brokerage account becomes compromised, brokerages owe you an obligation to restore your losses. If a brokerage refuses, you may have other remedies available as well.

Another interesting question involves the extent to which these companies owe an obligation to others to prevent fraud on the market by allowing such schemes to occur. In other words, does a brokerage owe an obligation to another non-customer investor who makes an investment decision based in part on the fraudulent trade activity which the brokerage arguably allowed to occur? Wouldn’t you be angry after making an investment decision in part based on trading volume of a particular company and later losing money because the trading volume really related to criminal activity which a brokerage allowed?