Posted By: Eugene Taylor

By Jonathan Keehner and Kevin Drawbaugh

NEW YORK (Reuters) - High-tech crooks using spyware are
costing U.S. discount brokerages millions of dollars to repay
clients who have been victimized by fraud, the brokerages said
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The U.S. Securities and Exchange Commission warned earlier
this month that scammers were hijacking online brokerage
accounts using spyware and operating from remote locations.

TD Ameritrade Holding Corp. (Nasdaq:AMTD - news) on Tuesday became the
latest brokerage to confirm the problem. It said it cost $4
million in the third quarter to make whole customers whose
accounts had been hacked.

Harder hit was rival E*Trade Financial Corp. (NYSE:ET - news), which
last week said its fraud losses ballooned by $18 million in the
third quarter from swindlers who stole clients' identities and
manipulated their accounts.

Both brokerages guarantee to repay clients who lose money
through such frauds. A spokesman for a third discount
brokerage, Charles Schwab Corp. (Nasdaq:SCHW - news), said the company
hasn't seen "anything unusual enough to merit a disclosure."

"During the quarter E*Trade, like a number of our
competitors, experienced a significant increase in losses
resulting from fraud relating to identity theft," said Jarrett
Lilien, president and chief operating officer, on last week's
conference call.

TD Ameritrade Chief Executive Joseph Moglia told Reuters
that all those who stole clients' identities did so by using
public computers rather than hacking into the Omaha,
Nebraska-based company's internal systems.

He called the $4 million hit "not material at all."

"This gets a lot of attention but it's not affecting the
share price," he said.

TD Ameritrade shares fell 79 cents, or 4.8 percent, to
close at $15.84, making them the top decliner on the Amex
Securities Broker Dealer index (^XBD - news).

Moglia blamed the share price fall on a cut on its
projections for 2007 earnings.

Both firms said they were strengthening their defenses.

"We've seen that level of fraud in the last three weeks or
so reduced to almost zero as a result of the changes we're
making," E*Trade CEO Mitchell Caplan said in last week's
conference call.

But Gwenn Bezard, an analyst with Boston-based consultant
Aite Group, said E*Trade had previously made big efforts to
bolster security and the $18 million increase was a sign of
hackers' resiliency in flouting fraud prevention efforts.

"It's a reminder that though you may have stronger
authentication it may not protect you from other types of
scams," he said.

Both E*Trade and TD Ameritrade said they are working with
investigators at the SEC, U.S. Federal Bureau of Investigation
and other agencies to crack down on the scammers.

About 25 percent of U.S. retail stock trades are made by
online investors through roughly 10 million online accounts,
according to brokerages regulator NASD.

In many of the schemes outlined recently by SEC officials,
crooks will load a victim's computer or a public PC with a spy
program to monitor a user's activities and capture vital
information, such as account numbers and passwords.

The program then e-mails the stolen information back to the
thief, who can use it to open victim accounts.

Once inside, the thief may sell off an account's portfolio
and take the proceeds. Or electronically hijacked accounts may
be used for "pump-and-dump" schemes to manipulate stock prices
for profit, SEC officials have said.

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