Online Trading Firms to Swap Fraud Tips

By Brian Krebs Staff Writer
Thursday, March 22, 2007; 5:45 PM

Representatives from some of the nation's top online stock trading firms will meet with federal law enforcement officials on Friday to discuss ways they can work together to combat Internet fraud.

Security experts from E*Trade, Fidelity, TD Ameritrade and Scottrade and other trading firms will meet with agents from the Department of Homeland Security, the FBI and the U.S. Postal Service. The meeting will be held in Pittsburgh at the offices of the National Cyber Forensics Training Alliance (NCFTA), a public-private partnership whose members collaborate on anti-fraud efforts.

FBI officials stationed at the NCFTA declined to discuss the agenda for Friday's meeting, deferring comment to the individual participants. E*Trade spokesperson Connie Dotson confirmed that her company would be sending several representatives to discuss techniques for combating fraud.

"To deter criminal activity and protect customer assets, we work with industry, law enforcement and federal regulators on an ongoing basis to share trend line data to help identify attack profiles," Dotson said. She emphasized that the company never shares customer-specific information.

Kelly Doria, a spokesperson for St. Louis-based Scottrade, said the company is sending at least two representatives to the meeting. "We are also trying to learn more about the threats facing the industry and other financial institutions who are all dealing with this issue, and this meeting and training are all about how we can better do that."

Representatives from other trading firms declined to talk on the record, but noted that just as criminals share methods and techniques, so does the financial services industry as a whole.

Sources contacted about the meeting said topics to be discussed at the gathering include ways to better share data on stocks that market partners have flagged as showing unusual activity, as well as real-time matching of stock spam to potential fraudulent activity.

The meeting comes amid increasing scrutiny from federal regulators into the growing trend of organized cyber crime gangs using compromised trading accounts to perpetuate stock fraud or to siphon funds from personal accounts. Earlier this month, a federal judge froze $3 million belonging to an Eastern European crime syndicate that used commandeered trading accounts to conduct so-called "pump-and-dump" scams, wherein fraudsters use hijacked accounts and spam to artificially drive up demand for thinly traded penny stocks.

In January, a federal court indicted three men from India for running pump-and-dump scams that affected 60 customers at nine separate brokerage firms, causing losses of more than $2 million. According to the Justice Department, the men used their own online trading accounts to purchase huge volumes of shares in certain penny stocks, then used hijacked accounts to fraudulently purchase more shares of the same stocks. When the stock price went up, they sold their personal shares for a "substantial profit," according to the indictment.

Avivah Litan, an analyst with Gartner Inc. who works closely with a number of online trading companies, said the industry as a whole has expended a great deal of effort and money to institute fraud-detection mechanisms pioneered by the credit card industry. But she said fraud detection is far trickier for trading firms than it is for credit card companies because of the real-time nature of online stock transactions.

The core concern, she said, are "false positives." For every 20 transactions a credit card company flags as potentially fraudulent, usually only one of those turns out to be fraud-related, Litan said.

"That's not such a big deal for the credit card companies, who can just call the consumer or temporarily place a hold on the account until they can verify" the transaction, she said.

"For the brokerage firms, most of the fraud detection has been built up largely around money transfers, and those they can often hold for a few hours or even a day if they need to," Litan said. "But pump-and-dump schemes are probably the most insidious type of fraud when it comes to building fraud detection applications because they demand real-time analysis. And as a trading company, you'd better not get it wrong and stop a client from trading on a legitimate transaction. That kind of thing will quickly put you out of business."

For Further Reading:

* Investigators Confronted by New Threats (The Washington Post, March 12, 2007)

* $3 Million Frozen in Cyber-Fraud Case (The Washington Post, March 8, 2007)

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