siliconinvestor.com (February 24, 2000) -- YOU WON'T SEE Kathleen Nyquist's story in those edgy, online-trading-is-fun television commercials for E*Trade Group (EGRP). Nyquist, a 44-year-old writer of children's science books and a former president of HarperCollins' Scott, Foresmann school publishing division, says that her husband lost nearly $750,000 trading stocks in two separate E*Trade accounts. Nyquist claims the online brokerage should have done something to stop her now-estranged husband, John, and is suing E*Trade for damages.

Over the two-year period in which her husband day-traded their life's savings into oblivion, Nyquist says, he concealed his loses from her. He even forged her name on documents to transfer money out of an IRA account she had with E*Trade so he could continue his frenetic trading. When Nyquist finally discovered just how bad the family's finances were last April, she says her husband went berserk. He tried to kill her by first throwing her off the balcony of their two-story home and then attempting to strangle her with his bare hands. John Nyquist is currently in a South Carolina prison serving a 5-year sentence after pleading guilty in September to assault with intent to kill.

"It was a horrifying experience," says Nyquist, who lives in Mount Pleasant, a suburb of Charleston, S.C. "It worries me. If John could do this, then other people could, too. I'm all for individuals taking control of their lives and financial futures, but we're very new into this medium and this is the worst-case story."
 
There's no doubt that Nyquist's story is a sad one. But should E*Trade be held liable for her husband's bad judgment? E*Trade officials won't comment on the lawsuit, filed late last year in South Carolina federal court. But it's all but certain that the online broker will argue that it can't be held liable for a customer's bad trades.

In fact, it would be easy to dismiss Nyquist's lawsuit as simply a case of an unfortunate victim wanting to find someone with deep pockets to compensate for her ordeal. After all, isn't investor autonomy what online trading is all about? In return for dirt-cheap commissions, investors get the freedom to buy and sell stocks as they choose ? and to soar or fall on their faces.

Nyquist concedes she was less than diligent in checking her monthly statements from E*Trade ? a step that would have alerted her sooner to the improper money transfers and huge losses in the two online accounts. She says she often deferred to her husband of 17 years on matters of household
finance.

But beyond pointing out the inherent risk of frequent online trading, Nyquist's lawsuit does raise questions about the obligation online brokers owe to their customers to make sure their accounts are secure. It appears that John Nyquist did indeed forge his wife's name on forms used to transfer money out of her E*Trade IRA account and into a regular E*Trade account that both spouses could access. In the criminal proceeding, he was originally charged with making three "unlawful withdrawals" from his wife's IRA account for more than $30,000. He ultimately pled guilty to one count of forging his wife's name on an E*Trade document.

And at least one noted securities lawyer says the element of forgery could spell trouble for E*Trade. Mark Maddox, an Indianapolis attorney who usually represents investors in disputes with brokerage firms, says all brokerage firms have a copy of an investor's signature on file, and have an obligation to make sure the signature on a form is authentic. 'There's no rule anywhere that says if you don't check your monthly statement you don't get any damages in a fraud,' says Maddox, a partner with Maddox Koeller Hargett & Caruso and president of the Public Investors Arbitration Bar.

The litigation also raises an issue about the obligation of online brokers to check for unusual activity in a customer's account. While investors are permitted to make withdrawals from an IRA account, most financial advisers will discourage them from doing so. In fact, under federal law, an investor is penalized for making a withdrawal before the age of 59 1/2 ? there is a 10% early-withdrawal tax penalty. One official at a traditional full-service
brokerage says it would raise a red flag if an investor wanted to make a series of withdrawals from his or her IRA account.

"I really think that with these online firms, we have to decide whether they are going to be treated like Web sites or brokerage firms," says Maddox. "This is an issue that there is of course going to be divergent opinions on."

One thing is for sure: with more and more people investing online, we're certain to see more cases like Nyquist's ? particularly if the markets keep turning south.

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