Crime Ring Used TD Ameritrade, Schwab in Online Fraud

Crime Ring Used TD Ameritrade, Schwab in Online Fraud

http://www.bloomberg.com/apps/news?pid=20601087&sid=antI0fUyHan4&refer=home

By Bradley Keoun and David Scheer

March 7 (Bloomberg) -- An Eastern European crime ring netted at least $733,000 in illegal profit using trading accounts at TD Ameritrade Holding Corp. and six other firms, in the biggest fraud yet uncovered by a U.S. probe of online stock manipulation.

The ring was traced to 20 residents of Russia, Latvia, Lithuania and the British Virgin Islands, the Securities and Exchange Commission said in a lawsuit filed yesterday in U.S. District Court in Washington. The group maintained trading accounts in the U.S. through Riga, Latvia-based JSC Parex Bank, the SEC said.

The case, which resulted in at least $2 million of losses for the brokerage firms, emerges from an investigation begun in late 2005 of Internet-savvy criminals who use other people's brokerage accounts to pump up stocks and dump them later at inflated prices. Since December, the SEC has brought similar cases against a 41-year-old Russian man who allegedly stole $354,000 and a 21-year-old Florida man who got $83,000.

``This action stems from a modern-day, technological version of the traditional pump-and-dump market-manipulation scheme,'' the SEC said in the complaint.

The fraud ring also targeted customers of Charles Schwab Corp., E*Trade Financial Corp., Merrill Lynch & Co. and closely held Scottrade Inc., Vanguard Brokerage Services and Fidelity Investments, according to the suit.

In a separate statement today, the SEC said it obtained an order freezing $3 million of assets held in the Latvian bank's U.S. trading account.

$22 Million in Losses

The SEC, FBI, U.S. Secret Service and NASD, the largest private regulator of brokerages, began the probe in late 2005, according to court filings. So far, firms have reported at least $22 million in losses because of the illegal trading schemes.

The manipulation announced today occurred from December 2005 through December 2006 and involved at least 15 stocks traded on the Nasdaq Stock Market, the SEC said.

According to the suit, the criminals bought thinly traded stocks then used stolen passwords to enter the online trading accounts of unwitting brokerage customers. The criminals liquidated the stocks in the compromised accounts and used the proceeds to buy shares of the targeted stocks. The rapid buying drove up the price, enabling the criminals to sell the targeted stocks held in their own accounts for a profit.

Brunt of Losses

Brokerage firms have absorbed the brunt of the losses because they offer online-security guarantees under which they reimburse fraud victims.

TD Ameritrade, based in Omaha, Nebraska, said last October it had costs of $4 million in the third quarter of last year to reimburse customers whose accounts were raided. E*Trade, based in New York, lost $18 million that quarter. E*Trade's efforts to make customers whole forced it to take ownership of 1 million nearly worthless shares of San Francisco strip-club operator BoysToys.com.

The attacks abated in the fourth quarter after the company enhanced the security of its Web site, E*Trade has said.

U.S. authorities disclosed the investigation in October, saying online attacks against brokerage firms, known as ``account intrusions,'' were increasing in frequency.

In December, the SEC said the Russian using an Estonian brokerage firm tapped into accounts at E*Trade, TD Ameritrade and Scottrade to manipulate at least 21 stocks.

The agency brought its second case in January against the Florida man who allegedly bid up 17 stocks, transferred his illegal profits to a bank account in Latvia and is now believed to have fled the U.S. and gone into hiding in Russia, according to the SEC.