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Regulation and Compliance > Litigation

Couple Sues Schwab and Hightower, Saying Fraudsters Looted Their Accounts

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What You Need to Know

  • Fraudsters turned off electronic notifications on the couple's account and took nearly $1 million in small transactions, the suit says.
  • The pair discovered the thefts after returning from a long vacation and reading their mail.
  • Schwab and Hightower should have monitored the accounts, the couple contends.

A San Diego couple who allege fraudsters stole nearly $1 million from their retirement accounts and turned off electronic notifications that could have alerted them is seeking damages against Charles Schwab & Co., which held the funds, and Hightower Advisors, which actively managed them.

Phillip and Pamela Reed, in a lawsuit filed in California Superior Court in San Diego on July 1, contend that from July 2022 to March 2023, “dozens of suspicious and unauthorized withdrawals” depleted their accounts with Schwab.

“And, because the perpetrators who unlawfully accessed the Reeds’ online Schwab account turned off all electronic transaction notifications, the Reeds were unable to discover the fraudulent account activity until it was too late.”

The Reeds accuse Hightower Advisors of breach of fiduciary duty and professional negligence, and allege negligence, breach of contract, and breach of implied covenant of good faith and fair dealing against Schwab.

The couple also contend Schwab failed to fully honor its “Security Guarantee,” which “purported to protect investors against losses caused by the precise type of unauthorized activity that depleted the Reeds’ retirement accounts,” the lawsuit says.

“Despite being paid to actively manage and monitor the Reeds’ investment accounts, Hightower never recognized a single suspicious transaction or the rapidly declining balances in the Reeds’ accounts,” the lawsuit says.

“And because the amount of each unauthorized transaction fell just below Schwab’s threshold for heightened scrutiny, Schwab never noticed or questioned any of the suspicious withdrawals.”

The Reeds have maintained several investment accounts, including retirement accounts, with Schwab since about 1991, and since 2020, Hightower, doing business as Frontier Investment Management Company, has actively managed their accounts, according to the Reeds’ lawsuit.

Unbeknownst to the couple at the time, their Schwab accounts were compromised by unknown individuals at some point in 2022.

Starting around July 21, 2022, “the perpetrators commenced a series of unauthorized withdrawals from the Reeds’ Schwab accounts that went undetected by either Schwab or Hightower,” the complaint says.

The unknown fraudsters stole the funds through numerous internal transfers from the Reeds’ retirement accounts to their family trust cash account, and subsequent transfers from the family trust to an unknown account at Wells Fargo Bank, the Reeds allege.

Each of these dozens of transactions fell below the $8,000 threshold amount that prompts additional scrutiny from Schwab, the lawsuit says.

Before leaving on a three-month vacation in December 2022, the Reeds notified their primary contact at Schwab that they would be away for several months. By the time the couple left on their vacation, the perpetrators had surreptitiously changed their Schwab account notification preference from paperless to paper notifications, the lawsuit says.

“As a result, the Reeds did not receive any electronic transaction notifications while they were away. Instead, for the duration of the Reeds’ extended vacation, at which time the perpetrators apparently knew the Reeds would not be home or able to review their mail, all Schwab account transactions were confirmed exclusively through paper notifications sent via U.S. Mail.”

When the Reeds returned from vacation in March 2023, they reviewed 42 paper account statements that had been delivered in their absence. On reviewing the statements, the Reeds noticed numerous unauthorized withdrawals that depleted their account balances by about $982,000, the lawsuit alleges.

Security Guarantee

The Reeds notified Schwab shortly after discovering the unauthorized transactions, the suit says.

Schwab’s Security Guarantee purports to automatically protect customers against such activity on condition they not share account access Information with any third party and report any unauthorized transactions to Schwab “as quickly as possible,” the suit says.

The Reeds say they complied with these requirements, as they never shared their account access information and were not in a position to discover the unauthorized transactions sooner because the perpetrators turned off all electronic transaction notifications, causing a delay in discovering the fraud.

“Although the Security Guarantee does not specify what ‘as quickly as possible’ means, Schwab declined to reimburse the full amount of the Reeds’ loss on the ground that they failed to comply with this condition,” the lawsuit states.

Schwab agreed to reimburse $196,400 of the Reeds’ losses pursuant to its Security Guarantee, an amount reflecting 20% of the $982,000 total amount stolen, the Reeds say, alleging that Schwab breached a duty of care as their broker-dealer.

Schwab’s duty required at least that it recognize “dozens of red flags” in the repeated and methodical withdrawals from retirement accounts in amounts falling just below Schwab’s threshold for enhanced scrutiny, the Reeds allege.

“Even a modicum of monitoring would have alerted Schwab to months of suspicious activity warranting investigation, including dozens of transfers from the Reeds’ retirement accounts to their family trust cash account,” the lawsuit contends.

At the time of the unauthorized withdrawals from the Reeds’ retirement accounts, Schwab had not implemented adequate procedures and internal controls reasonably designed to identify suspicious transactions, the couple alleges.

Trust Transfers

Hightower also breached a duty of care, the Reeds allege. Its Frontier Management brochure says the firm performs “ongoing portfolio monitoring, evaluation and rebalancing,” and “account reviews” on an “ongoing basis,” the lawsuit says.

“Accordingly, Hightower expressly undertook to monitor the accounts from which the Reeds’ retirement savings were stolen,” it contends.

“At a minimum, Hightower should have questioned numerous transfers from retirement accounts that directly contradicted Hightower’s advice,” the lawsuit contends.

Despite advising the Reeds to avoid withdrawing funds from retirement accounts without first consulting Hightower to address tax consequences and potential alternatives, “Hightower overlooked dozens of such transactions without making any effort to verify whether the Reeds had, in fact, authorized such transactions,” the suit says.

It adds that “a reasonably prudent investment advisor” would have identified the suspicious transactions and contacted the Reeds for confirmation.

Schwab didn’t immediately have a comment Tuesday.

A Hightower spokesperson said via email that the firm doesn’t comment on pending litigation.

Image: Adobe Stock


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