Fraudulent Transfer of Customer Funds

by | Oct 4, 2024 | Firm News

You return from a well-deserved vacation, relaxed and in a great mood.  But that changes dramatically when, a few days later, you happen to check your online brokerage account and discover that all of your securities have been sold and all of the proceeds have been wired to a bank account with your name on it.  But you didn’t authorize the sales and you certainly didn’t open a bank account for the receipt of stolen funds.

With a greater number of “bad actors” finding more sophisticated ways to hack into a customer’s brokerage account, firms are trying to thwart their efforts. Sometimes they fail, causing their customers to lose substantial amounts of their investment assets.  While the brokerage firm itself was not the bad actor, it unwittingly facilitated the fraud despite having a responsibility to established and implement reasonable systems to protect its customers’ assets.  FINRA sets the regulatory framework that brokerage firms must follow and has repeatedly directed them to protect their customers from digital threats.  Most notably:

  • FINRA Regulatory Notice 21-18 (May 12, 2021) “Practices Firms Use to Protect Customers From Online Account Takeover Attempts”
  • FINRA Regulatory Notice 09-64 (Nov. 2009) “FINRA firms must have and enforce policies and procedures governing the withdrawal or transmittal of funds or assets from customer accounts, including instructions from an investment adviser or other third party purporting to act on behalf of the customer.”
  • FINRA Regulatory Notice 12-05 (Jan. 2012) “Firms must have adequate policies and procedures to review and monitor all disbursements it makes from customers’ accounts, including but not limited to third-party accounts, outside entities or an address other than the customer’s primary address.”

These FINRA Notices highlight the obligation that brokerage firms have to catch hackers before they wreak havoc on the accounts of unsuspecting customers.  Firms are, indeed, the firewall of protection, but with smarter “bad actors” comes the need for smarter monitoring and detecting systems.  When those systems fail due to “a crack in the system,” customers become victims and if it is found that the firms failed to fulfill their obligations and adhere to FINRA’s guidelines, customers can succeed in arbitration in getting their money returned

If you have suffered losses as a result of an unauthorized or fraudulent transfer from your investment account, you need experienced counsel with knowledge of the regulatory requirements that should have protected your assets.  Contact Kaufmann Gildin & Robbins LLP for a complimentary consultation.