Securities insurer warns of brokerage identity fraud

WASHINGTON — An insurance fund is warning people about a new fraud scheme whose perpetrators use the Internet and "steal" brokerage firms’ identities to bilk money from investors in the United States and abroad.

The Securities Investor Protection Corp., the insurance fund that protects investors if their brokerage firm goes bankrupt, describes the scheme as a new form of identity theft and says it is proliferating. SIPC issued a public warning late last week and announced that it had given relevant material to the Securities and Exchange Commission and state securities regulators.

The organization began receiving telephone calls about six months ago from U.S. investors who had fallen victim to it, SIPC President Stephen Harbeck said in an interview Wednesday.

The perpetrators are able to cloak their identities in the Internet and "are acting completely outside the law," Harbeck said.

He said SIPC had received complaints from "more than a dozen" victims of the fraud. Since most investors who are ripped off don’t report it to authorities, SIPC believes that is "just the tip of an iceberg," said Harbeck.

The scheme works like this: Scam artists set up a Web site that uses the name, or one similar to, a brokerage firm that is a SIPC member, but with a different Internet address. The names used are generally of lesser-known firms that don’t do retail business. The fictional entity claims to be a well-established firm and encourages prospective investors to check the membership database on SIPC’s Web site for verification.

In some cases, the phony firm simply offers stocks for sale, taking investors’ money — often by wire transfer. In others, the perpetrators offer to buy low-value stocks at a high price, sometimes saying they represent a third party seeking to obtain a controlling interest in the company. The catch is that the seller must make a substantial "good faith" deposit before the stock sale. When no sale is made, the seller may be told by e-mail that, for example, the SEC had disallowed the trade.

In one case reported to SIPC, the seller was told that the once-eager buyer had contracted cholera and the sale was off.

Besides the United States, victims have come from Australia, Canada, Denmark, the Netherlands, Norway, Singapore, South Africa and Sweden.

Washington-based SIPC, with some $1.2 billion in reserves and access to credit lines, is an independent corporation that is funded by the securities industry. Its role is similar to that of the Federal Deposit Insurance Corp., which insures bank deposits, but SIPC doesn’t have the same regulatory powers exercised by the FDIC.