TELECOM Digest OnLine - Sorted: Hackers Disrupt On-Line Brokers

Hackers Disrupt On-Line Brokers

Jonathan Keehner (
Wed, 25 Oct 2006 17:25:45 -0500

By Jonathan Keehner and Kevin Drawbaugh

High-tech crooks using spyware are costing U.S. discount brokerages
millions of dollars to repay clients who have been victimized by
fraud, the brokerages said in recent days.

The U.S. Securities and Exchange Commission warned earlier this month
that scammers were hijacking online brokerage accounts using spyware
and operating from remote locations.

TD Ameritrade Holding Corp. on Tuesday became the latest brokerage to
confirm the problem. It said it cost $4 million in the third quarter
to make whole customers whose accounts had been hacked.

Harder hit was rival E*Trade Financial Corp., which last week said its
fraud losses ballooned by $18 million in the third quarter from
swindlers who stole clients' identities and manipulated their

Both brokerages guarantee to repay clients who lose money through such
frauds. A spokesman for a third discount brokerage, Charles Schwab
Corp., said the company hasn't seen "anything unusual enough to merit
a disclosure."

"During the quarter E*Trade, like a number of our competitors,
experienced a significant increase in losses resulting from fraud
relating to identity theft," said Jarrett Lilien, president and chief
operating officer, on last week's conference call.

TD Ameritrade Chief Executive Joseph Moglia told Reuters that all
those who stole clients' identities did so by using public computers
rather than hacking into the Omaha, Nebraska-based company's internal

He called the $4 million hit "not material at all."

"This gets a lot of attention but it's not affecting the share price,"
he said.

TD Ameritrade shares fell 79 cents, or 4.8 percent, to close at
$15.84, making them the top decliner on the Amex Securities Broker
Dealer index.

Moglia blamed the share price fall on a cut on its projections for
2007 earnings.

Both firms said they were strengthening their defenses.

"We've seen that level of fraud in the last three weeks or so reduced
to almost zero as a result of the changes we're making," E*Trade CEO
Mitchell Caplan said in last week's conference call.

But Gwenn Bezard, an analyst with Boston-based consultant Aite Group,
said E*Trade had previously made big efforts to bolster security and
the $18 million increase was a sign of hackers' resiliency in flouting
fraud prevention efforts.

"It's a reminder that though you may have stronger authentication it
may not protect you from other types of scams," he said.

Both E*Trade and TD Ameritrade said they are working with
investigators at the SEC, U.S. Federal Bureau of Investigation and
other agencies to crack down on the scammers.

About 25 percent of U.S. retail stock trades are made by online
investors through roughly 10 million online accounts, according to
brokerages regulator NASD.

In many of the schemes outlined recently by SEC officials, crooks will
load a victim's computer or a public PC with a spy program to monitor
a user's activities and capture vital information, such as account
numbers and passwords.

The program then e-mails the stolen information back to the thief, who
can use it to open victim accounts.

Once inside, the thief may sell off an account's portfolio and take the
proceeds. Or electronically hijacked accounts may be used for
"pump-and-dump" schemes to manipulate stock prices for profit, SEC
officials have said.

Copyright 2006 Reuters Limited.

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