David R. Henderson  

You're not a Frequent Trader? We'll Take Your Stuff

The Horwitz Challenge... My Run-in With the Washington ...

When I got home from work Tuesday evening, there was a message on my answering machine from E*Trade. I have an account with E*Trade that I've used to buy stocks. I'm not an active trader. I tend to buy and hold, even for years. I don't recommend that strategy; I don't not recommend it; I'm just stating a fact.

I couldn't believe what I heard. E*Trade warned me that because I hadn't done anything with the account in the last 3 years, it was planning to turn the account over to the government unless I called. In other words, I had to take action to prevent E*Trade from turning over my property to a government--I think the California state government.

I don't blame E*Trade. In fact, I'm grateful that someone called. So I called this morning and, sure enough, I had heard the message correctly. Had I not called, I would have lost assets worth about $6,000 (last time I checked.) But I do blame the greedy, graspy, indeed wicked, state government. And, just in case, I'm going to sell the stock and then close the account.

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CATEGORIES: Property Rights

COMMENTS (17 to date)
Hyena writes:

That's just insane.

John B. writes:

It gets worse. In most states, bank accounts which are "idle" long enough are confiscated by the state.

The banks would rather have the money themselves so many banks levy a fee on idle accounts triggered after a shorter time than the state confiscation. This lets them grab some of the money before the state grabs it.

I believe that banks legally have to notify you of the incipient state takeover but I suspect that they don't have to notify you of their fee other than in whatever regular statements they send. So you can lose money to a bank's idleness fee with no warning.

I complained about one such fee applied to me; the bank spokesperson tried to claim that an idle account posed an extra burden on their software and the fee paid for that burden!

Brian Moore writes:

What possible justification is there for this? What laws govern this?

I was entirely unaware that this could happen. Can you give more information? Did they cite a specific regulation/law?

J. Daniel Wright writes:

I didn't choose e*Trade as my broker for a similar reason - they had a churn fee. If you didn't complete a minimum amount of trades per month then they charged you! I think TD Ameritrade and Schwab all had one, too. I went with Scottrade because they did not. I have been very satisfied with Scottrade. I'm in no way related to that company, but I highly recommend it.

Ted writes:

I would like to point out that every state that has this type of law allows you to reclaim your assets from the state. God knows how long it would take them to process the paperwork, but you would get it back eventually. Although, I also know there are some cases that have been reported where the property and asset claims have been turned over to the state, but the state claims they don't have it and it just becomes a mess. I don't know how common that it, but it happens.

The rationale for the law is relatively simple though - it's just the escheat doctrine. This goes back to 12th century feudalism where it had a slightly different meaning, but today it basically means that in situations where, say the property owner dies and there is no rightful claimant or heir that the state intervenes and takes hold of assets in order to prevent "ownerless property." However, the doctrine has been slightly warped in these cases. An inactive account isn't exactly the same. I suppose you can make a case that when an account is inactive it could potentially be ownerless as the owner may have died and nobody knows about (but that also doesn't mean there is no rightful heir, even if the person died so one should find the heir before invoking escheat)- but in those cases it should be obligation of the state to attempt to find if their is indeed an owner or heir and they should have to prove that they reasonably cannot find one in a court law (so a judge can assure they met the standard for seizure). The individual shouldn't have to go through the hassle of trying to get their property back unless the state convincingly presented evidence that there was no rightful claimant. It shouldn't work under the assumption that the owner has to prove his rightful claim - the state should have to prove that there is no longer a claim to it. The law seems to be written that way, but it's hardily implemented that way because there isn't a proper judicial check embedded.

By the way, the statue in California is Civil Procedure, Part 3, Title 10 (Unclaimed Property), Chapters 5-7. But plenty of states have similar ones.

Ted writes:

Also, 3-years seems a bit short to invoke the escheat doctrine - particularly for a financial trading account. A decent amount of people hold the same stocks for longer than 3 years, particularly if they are blue-chip investors.

John Hall writes:

Ted answered brilliantly, but I think the whole concept of escheat is ridiculous. If something becomes unowned, then the next possessor of it should be allowed to homestead it and obtain a property right in it. If somehow stocks held in custody by eTrade become unowned, then eTrade as the possessor should be able to prove they are unowned in a court of law and obtain title. No real reason why the government should have this right.

In addition Mr. Henderson said, "I don't blame E*Trade." I think that's a cop out. They and other financial companies have the means to lobby for the sorts of changes to the law that Ted pointed out. The fact that they have spent their lobbying budgets on other things, means they (and all other financial institutions where this could happen to their clients) should have some blame for not standing up for their clients.

Joey Donuts writes:

And we laugh at those who keep their money under the mattress!

guthrie writes:

John B., FWIW, the fee is, by law, listed in the documentation given to a customer when an account is opened. A statement is sent at the very least on a quarterly basis - again, by law - and that counts as correspondence.

Most banks use a database service, i.e. Fiserv, who charge the bank per account to use the service. So, yes, it costs money to keep accounts open, and if there's no activity, there's no chance to generate income (and no incentive to keep activity going)... unless there's a charge. Typically checking accounts can be idle for a year before the charge appears, but each bank comes up with their own timeframe. I imagine e*trade has a similar arrangement with their server.

A bank is not a school in the business of teaching its customers reading (in the case of the opening docs) or arithmetic (in regards to account balances). A bank is not a non-profit organization providing services for free (nor utilizing services for free). It’s just a business like any other that provides a service.

Also… you won’t find bedbugs at most banks. Just sayin’. :)

Hyena writes:

@John Hall

The difficulty is in establishing when an asset has become "unowned". The obvious solution with "zombie money" like unused bank or trading accounts is to simply let them sit there, totally unclaimed, forever.

The harmful scenarios--like a company owned by zombie money--are pretty unlikely. Robin Hanson has a good argument for letting zombie money do more than just sit around, so it seems plausible that to let sleeping money lie might be the best thing for all involved.

John Hall writes:

I view this as an incredibly minor issue that could easily be resolved. Something like a company owned by "zombie money" is not just unlikely, its patently ridiculous in a world where the most of the largest companies are owned only indirectly by people through mutual funds.

Here's another one that pisses me off, someone purchases a safety deposit box at a bank in California for say 10 years, but then if they don't contact the bank for three years, the government may seize the property. If you pay for 10 years, there's NO(!) reason why you could consider the property unowned until the 10 years is up and the bank tries to contact the owner about recovering it.

For the sake of simplicity, I'm going to assume that all of this money/stocks/bonds is held in accounts where the bank or financial institution at least knows the name of the person who created the account and their address at the time of creating it. Most people either receive paper statements or email statements. So the bank should still be able to contact someone via email if they fail to notify the bank of a change in address. This will only be more powerful in the future.

While there may be many ways theoretically money becomes "zombie money" so far as I can tell the most common would be if the owner controlling it dies without having any next of kin or will and the bank is never notified.

First a bank should set up a procedure to verify the name/address/death on any account that has been inactive for a year or two. With email this should be much less important. So long as you can continue to verify the name/address on the account, there is no reason you can consider it "zombie money" The bank could set up a set of procedures that they if after 5 years of inactivity or failure to verify (and the account still has a balance after 5 years of fees), then they can go to court to claim the balance of their assets in the account. The burden should be on the bank to show that they have done everything necessary to try to contact the person. If the person is alive and either that person or their agent refuses to defend themselves, then the money can be transferred to the bank. All the person should need to do to stop the process is call the bank and tell them their new address. If the person is dead, the bank should contact the probate lawyer and see if there is any person the money should be transferred to. If the bank finds none, they should be able to prove to the court they are the possessor of the funds and the court should find them as the current owner.

Chris Koresko writes:

This happened to me, also in California, but it involved a checking account at a credit union. The amount I lost (because I didn't read the letters they sent, thinking nothing interesting could be going on) was only $100. I did get a form at some point which would have let me put a claim on my money and eventually recover it, but the hassle seemed to be about $100 worth and I never got it done.

My feelings about this kind of policy this mirror David Henderson's.

Liam writes:

Be thankful, e-Trade didn't have you declared dead, David.

Hyena writes:

@John Hall

How is your system simpler/better than my proposal to let sleeping money lie for the next 1,000 years or so and resolve escheat case-by-case if it becomes necessary?

Doc Merlin writes:

Its also why there is iirc a 100% tax on expiration of prepaid cards and gift cards.

Rick Stewart writes:

The total amount of money involved here is a molehill, not a mountain. Our company (a coop, owned by our customers) faced the same situation - when an account went inactive and seemed to drop off the face of the earth, the state wanted all the unclaimed 'share money' and deferred patronage dividends.

Given a choice between using it ourselves, and giving it to the government, we simply inserted language into our by-laws that changed the unclaimed assets into donations to the coop. In 30+ years, there has never been a single incident of anyone coming forward to claim their money.

Most of it falls into the category of nickels and dimes, but I do remember a 'warehouse' in Washington, D.C., that evaporated and left about $12,000 behind. I think they all moved to Jamaica, perhaps explaining why they forgot about the money.

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