Hackers in Eastern Europe and Asia have been infiltrating customer accounts at US online brokers and making unauthorised trades to artificially inflate the price of some stocks. The 'pump and dump' fraud has reportedly cost E*Trade at least $18 million in the third quarter alone.
According to news reports The Federal Bureau of Investigation (FBI), the Securities and Exchange Commission (SEC) and the NASD are investigating the pump-and-dump stock schemes, where criminals use funds from looted brokerage accounts to drive up the prices of little-traded stocks. They then sell shares they had bought earlier at a profit.
E*Trade said last week that the fraud has cost it $18 million in losses in the third quarter alone. TD Ameritrade has also been hit by the schemes but specific details of losses have not been disclosed.
E*Trade CEO Mitchell Caplan told investors that the illicit trading had been traced to "concerted rings" in Eastern Europe and Thailand.
Caplan said that E*Trade reduced the fraud to "almost zero" in the past three weeks after increasing e-trading security.
E*Trade COO Jarrett Lilien said the perpetrators are more organised and the fraud was a bigger issue the third quarter than it had ever been before. He said the fraud wasn't just hitting one company but was "hitting everybody".
At an industry conference earlier this month John Walsh, chief counsel in the SEC's office of compliance inspections and examinations, told delegates that the online version of the pump and dump fraud is not often discovered early enough because no money is withdrawn from the infilterated accounts.
Walsh said the SEC had began an examination of brokerage firms to determine if they have adequate technology and staff training to detect and prevent online fraud.
In August regulators in Canada warned brokerages to be on the alert for suspect activity after a number customer accounts were liquidated and the funds used to place orders for specific securities listed on the OTC Bulletin Board and the Nasdaq pink sheets.