NEW YORK (Bloomberg) — Mitchell Caplan, E Trade Financial Corp.’s chief executive officer, is reluctant to explain how his company came to own 1 million shares of BoysToys.Com Inc., a San Francisco strip-club operator that went bankrupt in 2001.“I’m not interested in talking about it so much,” Caplan said in an interview earlier this month. “It just encourages the bad guys.”

E Trade, the fourth-largest US discount broker, bought the BoysToys shares from customers whose accounts were stuffed with the near-worthless stock in August, according to a September 8 regulatory filing. Caplan told investors last month that the New York-based firm had been the victim of Internet thieves from Eastern Europe and Asia.

US regulators, including the Securities and Exchange Commission, are investigating how criminals exploit security gaps in online-brokerage accounts and use them to manipulate prices of little-traded stocks. After trading at no more than 5 cents for 2 [1/2] years, BoysToys rose to a high of 13 cents on August 10 when a record 3.7 million shares changed hands, data compiled by Bloomberg show. The following day, it was back down to 4 cents.

“In order to make our customers whole, we ended up taking ownership,” said E Trade spokeswoman Pam Erickson. “They ended up with the stock in their portfolio by no action of their own.” E Trade sold its BoysToys shares in September, she said.

The Federal Bureau of Investigation, the SEC, the US Secret Service and the NASD have been probing “pump-and-dump” scams for at least three months, company officials said. Such frauds cost E Trade $18 million and rival TD Ameritrade Holding Corp. $4 million in the third quarter.

E Trade ended up owning 13 percent of La Jolla, California- based BoysToys, which trades in the over-the-counter market under the ticker GRLZ. The broker also was forced to assume 475,000 shares, or 15 percent, of Speizman Industries Inc., a bankrupt distributor of sock-knitting machines in Charlotte, North Carolina. On August 10, Speizman’s stock soared to 14.5 cents from 0.5 cents before tumbling back to 3 cents within a week.

“I’ve never heard any of this and I really don’t know anything about it,” said Robert Speizman, the company’s 66- year-old founder, in a telephone interview.

Speizman, who left the company in early 2004, is the second-largest shareholder after E Trade.

E Trade’s Erickson declined to disclose how much the company paid its customers for their BoysToys and Speizman shares, or say what other stocks might have been manipulated. E Trade still owns the stake in Speizman.

The BoysToys and Speizman transactions represented part of E Trade’s total losses from fraud in the third quarter, Erickson said.

Officials at Omaha, Nebraska-based TD Ameritrade, the third-biggest online broker, have declined to comment specifically about the fraudulent trades or about the government’s investigation.

BoysToys chairman Ralph Amato said he was unaware of the scam until receiving a call from Bloomberg News.

The former Paine Webber account executive founded BoysToys as an operator of topless clubs and adult-entertainment websites in 1997, SEC filings show.

His company went public in 1998 on the over-the-counter market at $1.25 by merging with a shell company. It traded as high as $4.25 in early 1999, amid the euphoria for dot-com stocks.

The company’s main asset was a 15,000-square-foot topless club opened in 2000 in San Francisco’s North Beach neighbourhood, about four blocks north of the Transamerica Pyramid building, according to filings with securities regulators.

“We attracted a real business crowd,” Amato said.

BoysToys went bankrupt after a dispute with its landlord, SEC filings show.

The day BoysToys surged, on August 10, the volume of shares traded was more than 80 times the 12-month average.

“I called my attorney and I said, ‘Look there’s something strange going on with BoysToys stock’,” Amato, 55, said. “He said there’s nothing you can do about it.”

E Trade has since added software to automatically detect suspicious trades. Caplan, 49, said that has helped E Trade reduce the fraud to “almost zero”.