Fraudulent Stock Transactions

From a Business Week story:

During July 13-26, stocks and mutual funds had been sold, and the proceeds wired out of his account in six transactions of nearly $30,000 apiece. Murty, a 64-year-old nuclear engineering professor at North Carolina State University, could only think it was a mistake. He hadn’t sold any stock in months. Murty dialed E*Trade the moment its call center opened at 7 a.m. A customer service rep urged him to change his password immediately. Too late. E*Trade says the computer in Murty’s Cary (N.C.) home lacked antivirus software and had been infected with code that enabled hackers to grab his user name and password. The cybercriminals, pretending to be Murty, directed E*Trade to liquidate his holdings. Then they had the brokerage wire the proceeds to a phony account in his name at Wells Fargo Bank. The New York-based online broker says the wire instructions appeared to be legit because they contained the security code the company e-mailed to Murty to execute the transaction. But the cyberthieves had gained control of Murty’s e-mail, too. E*Trade recovered some of the money from the Wells Fargo account and returned it to Murty. In October, the Indian-born professor reached what he calls a satisfactory settlement with the firm, which says it did nothing wrong.

That last clause is critical. E*trade insists it did nothing wrong. It executed $174,000 in fraudulent transactions, but it did nothing wrong. It sold stocks without the knowledge or consent of the owner of those stocks, but it did nothing wrong.

Now quite possibly, E*trade did nothing wrong legally. There may very well be a paragraph buried in whatever agreement this guy signed that says something like: “You agree that any trade request that comes to us with the right password, whether it came from you or not, will be processed.” But there’s the market failure. Until we fix that, these losses are an externality to E*Trade. They’ll only fix the problem up to the point where customers aren’t leaving them in droves, not to the point where the customers’ stocks are secure.

Posted on November 10, 2005 at 2:40 PM • 47 Comments