Are IB accounts protected from fraud and unauthorized access?

[loufah]

Quote from GTC:

I disagree. Do you happen to have known or heard any examples in which the brokerage firms that have fraud protection did not restore its deserving clients' accounts after the fraud occurrence?

I don't personally know of online firms with fraud protection in which clients lost money due to the actions of the broker's employees (which was what my post was addressing). But in response to your broader question, there's a thread here http://elitetrader.com/vb/showthread.php?s=&threadid=90860 about someone who says he's getting no response from E*Trade about unauthorized transactions.

Personally, I've been a victim of unauthorized trades by a full-service broker. I promptly reported the problem to the firm's management and to the clearing firm. I got no money back. My case wasn't isolated; the broker and many of his coworkers went to jail.

 

[loufah]

Quote from loufah:


Personally, I've been a victim of unauthorized trades by a full-service broker. I promptly reported the problem to the firm's management and to the clearing firm. I got no money back. My case wasn't isolated; the broker and many of his coworkers went to jail.

Since there will probably be some ad hominems about how naive I was/am, yes, it was 14 years ago and I was naive.

 

[jimrockford]

Here is E-trade's fraud protection guarantee, from its website:

Our promise to you is simple: E*TRADE Securities LLC or E*TRADE Bank will cover any loss that results from the unauthorized use of our brokerage, banking or lending services.

Here is what indahook says happened, in his thread, when he tried to hold E-trade to this guarantee:

Quote from indahook:

Let me prefice this by saying I have never bashed a firm in a public forum. I have an account with E-trade by default. I opened a Dreyfus brokerage account in 1999...then BrownCo bought them..now Etrade. Never had an issue with the first two, in fact Brownco was one of the best firms I ever dealt with.
So, after Etrade bought Brownco I started liquidating position and ACATing stuff out. I had heard they were not the best. So as of March 11th all I had in there was one restricted stock position and one tiny penny stock position. I thought it best to just let them be and leave the account alone for now. No cash.
I log in on March 12th to get a quote cause i`m away from my trading machine. And there is a negative balance of 2200.00...and they liquidated the penny stock position.


Day one March 12 = I call them up..get connected to a call center in India where nobody can tell me what happened. They put me on hold for 10 minutes while they find a "licensed broker" ( what kind of Firm doenst have licensed brokers answering first calls???). So I RR on the line who tells me the obvious. The account has a deficit...no shit sherlock holmes. No joy...nobody can tell me why.

Day 2 March 15th = I call etrade..get connected to india...no licensed brokers..let me get one on the line. 10 minutes later "D" cannot tell me what happened..only that I have a deficit. He says he will investigate and call me back.

Day 3 March 16th = I call them because "D" has failed to call me back. Once again..Inida...15 minutes...licensed broker. "J" Seems capable. Not. "you have a deficit...A check came back from Feb 2006 (thats right...2006). I tell him I never had a checking account with Etrade of Brownco of Dreyfus..just a cash account. And the only checks I ever requested were from available cash. He says he will call me back with an anaswer.

Day 4 March 19th = Nobody has called me back and I get a collections notice from e-trade stating I owe them 2200.00 or they will involve legal action. I call..get india..hold for 10 minutes while they get a RR..."M" gets on the phone. 'Hey Mr C...you have a deficit here" Now i`m getting really pissed off. I explain to him the same shit I told the 2 before him. He says this is under investigation and he will have to call me back. LOLOL..I laugh in his ear and tell him etrade is the most fucked up BD I ever had the displeasure I doing biz with.

So now it is the 29th. Nobody at etrade has called me back. They are sending me collections notices for a negative balance I did not create. And they sold out the one position I had in the account to meet the bogus call.

I cannot get satisfaction. I would beg anybody that is thinking about opening a etrade account to think long and hard about it. And if you have to call them you will end up on hold with India while Ganesh calls himself "johny" and cannot even talk about your statements because he is not a licensed broker.

What a shit show

 

[GTS]

Quote from jimrockford:

Here is E-trade's fraud protection guarantee, from its website:

Here is what indahook says happened, in his thread, when he tried to hold E-trade to this guarantee:

I don't see how that story supports the position that IB should add fraud protection (at its customers expense), if anything it seems to refute that, unless you assume that IB's protection will be better then E-Trades.

In any case fraud protection only works if the firm agrees that fraud had occurred. In the case of an "inside job" I suspect that they would say that there was no fraud and that the unauthorized trades were placed by the customer - end of story.

Unless there is an independent 3rd party involved you are always going to be at the mercy of the brokerage to make the determination of fraud.

IB's customer service track record (based on anecdotal evidence posted here) does not give me much hope that its handling of a fraud investigation would be any better then E-Trades.

 

[Jayford]

Quote from ybfjax:

[B
]Well, I was speaking to a broker about the Refco incident and he said that all of his customer's funds were easily transferred in the matter of about 1-3 business days to another brokerage.
Now the issue of fraud (as in fraud committed by the brokerage against the client?), I'm not sure. You can file a complaint with the CFTC, but that's not the exact same as having an actual insurance policy. But then again, what would the insurance company actually do in this senario? For example, your broker trades your acct funds for you without your permission..... [/B]

In the case of futures, fraud by the brokerage firm against the client results in the client getting screwed. There is no protection whatsoever. I know this for a fact because it happened to me. Took two years of court cases, and after the assets of the firm were all settled, customers received 50% approx of their funds back. We were lucky. it could have been zero. The firm was Futurewise Trading.

In the case of fraud, segregated funds mean absolutely ZERO. Why, because if the firm is clearing the trades, as in Refco FX, they have access to the funds even though such access is illegal. This is where the fraud comes in.

In the case of IB, if it is typical of most firms, you have no protection if someone accesses your account, so keep that password secured! If the firm should fail (highly unlikely as they are considered one of the safest financially in the World due to their reserves/customer funds), then your funds would be transferred to another firm. In the case of fraud in which they tap segregated funds to pay bills, as Refco did, you are screwed. It goes to court, someone at IB may go to jail, and it is a tossup if you get funds back. at Refco, futures traders were largely unaffected cause the main problem was with the FX arm.

 

[GTC]

The famous E-trade fraud case in which the guy lost ~184k or sobecause of fraud--got resolved. E-trade has a lot of problems;--but the fraud protection guarantee needs to be considered as a plus point for E-trade.

In Ameritrade case, Ameritrade's says the account breach was not the same. The accounts that got affected in Ameritrade's case, got restored in a couple of days.

The cost of providing fraud protection guarantee cannot be unbearable since a brokerage firm charging $5/trade (or even $3) for unlimited shares can do that. Unresolved fraud incidents not only can wipe out clients accounts but also can wipe out brokerage firms' reputation. The ostrich approach to avoid this danger is not going to help.

 

[trendtech]

Prevention is always better than cure. I think IB is on a right track by implementing a fraud prevention steps rather than a ready made solution for a damage already done. As a day trader I would not like any increase in my commissions and fees because of some kind of insurance guarantee. You can't compare IB to Ameritrade or ETrade because they don't offer the same kind of service (direct access) as IB and their customers (mostly position or long term traders or investors) have different needs than IB customers.
IB should introduce mandatory use of a security device for login and transactions and some other measures (already suggested by traders) to prevent unauthorized trading and also stop sending e-mails to customers, especially e-mails with login links.

 

[jimrockford]

Quote from GTS:

I don't see how that story supports the position that IB should add fraud protection (at its customers expense), if anything it seems to refute that, unless you assume that IB's protection will be better then E-Trades.

In any case fraud protection only works if the firm agrees that fraud had occurred. In the case of an "inside job" I suspect that they would say that there was no fraud and that the unauthorized trades were placed by the customer - end of story.

Unless there is an independent 3rd party involved you are always going to be at the mercy of the brokerage to make the determination of fraud.

If your broker gives you 100% fraud protection, you have a guarantee that is worth something. If the broker breaks that guarantee, by refusing to make you whole after a fraud, you can sue the broker for breaching the guarantee. If there is no guarantee at all, you are on weaker ground, because then you must prove that the broker was at fault for allowing the fraud to occur.

 

[jimrockford]

Quote from Jayford:

If the firm should fail (highly unlikely as they are considered one of the safest financially in the World due to their reserves/customer funds), then your funds would be transferred to another firm.

No, not necessarily. If your broker fails, your funds might disappear as a result of the broker's failure. If this happens, then there might be insufficient customer property, or maybe none at all, in order to restore your account equity. Your SIPC protection is limited for a securities account, and totally non-existent for a futures or FX account. This is why it is so important to trade at a broker, like IB, which takes steps to minimize the risk of broker failure.

 

[GTS]

http://www.elitetrader.com/vb/showthread.php?threadid=92900

So if you download some software from the internet to link between TWS and another app and it turns out that the linking software has a backdoor in it that allows the software developer to place trades in your account (without your knowledge/consent), would that be covered by these fraud protection policies or not?

I'm betting no...