Modern Government Investigations Embrace Technological Advances
Technology has long been utilized by those interested in committing frauds. However, in more recent times, the very use of technology has become a means and instrumentality for the actual fraud and other illegal activity itself. Over the last decade, the government has, essentially, "woken up" and increased its own technological capabilities to keep pace with these criminal enterprises.
Although in other areas, recent news reports implicating the National Security Agency in monitoring the email activity of private citizens1 and the Department of Homeland Security's increased use of facial scanning software2 have demonstrated that the U.S. government and its agencies will employ sophisticated means and take action it deems necessary to combat illegal activity. At the same time—and somewhat ironically—the government is criticized for its apparent unwillingness—or inability—to combat other illegal activity such as securities fraud and other related types of economic fraud that resulted from the economic implosion beginning in 2008.3 In fact, many commentators point out the lack of prosecutions for failures in accounting control and bank fraud.4 Further, from a public perspective, the government always appears to be a step behind in prosecuting complex investment vehicles such as hedge funds and trading platforms for anything other than insider trading.5 Consequently, we are still left faced with the appalling questions regarding if the government lags behind in technology to these would-be fraudsters, and, if so, is the government even close.
This article discusses the impact of the complex technology used in the financial world, the manner it may be used to run afoul of securities and other laws, as well as the government's development of tools to address the situation.
How Technology Is Exploited to Further Fraud
Initially, it is important to understand that technology and social media are the means and instrumentalities of a significant portion of economic crime in the United States and abroad. The use of such technology in these criminal schemes may be simple or exceedingly complex.
For example, the U.S. Attorney's Office for the Southern District of New York recently announced the arrest of certain individuals who were allegedly involved in a penny stock fraud scheme that swindled investors in 35 countries out of more than $140 million.6 The indictment alleged that the accused promoted certain stocks in emails, social media messages and news releases—hardly the stuff of science fiction. For its part, the government was able to use traditional means such as wiretaps and video surveillance to uncover the alleged pump and dump scheme.7
That the scam was uncovered is not surprising. The Federal Bureau of Investigation (FBI) reportedly had agents on Twitter and other social media sites, such as Facebook, trolling for tips that may constitute insider trading. Despite these successes, the FBI, however, is quick to point out the difficulty in predicting the next wave of securities fraud, suggesting advances in technology and social media will be critical in its future enforcement efforts.8 In particular, an FBI agent reportedly told Reuters TV in an interview for the Reuters Investment Outlook 2013 Summit that, in terms of the future of criminal fraud, "…technology will play a huge part, social media, Twitter. Any kind of technology that is new and doesn't exist today, if there is any way to exploit it, these individuals will exploit it."9
Additionally, FBI Director Robert Mueller noted that the FBI had a 49 percent increase in corporate and securities fraud cases since September 2008, when Lehman Brothers Holdings Inc. filed for bankruptcy. Mueller also testified that the FBI was investigating more than 2,600 fraud cases by the end of 2011.10 The FBI has responded to this challenging environment by adding teams of accountants, financial analysts and special agents headquartered in Washington, D.C., to analyze financial data and staff complex investigations as needed. For example, the FBI used these special agents in the recent Libor investigation.11
Beyond the world of social media lies the more complex issues related to automated trading in the financial markets. In 1998, after the U.S. Securities and Exchange Commission (SEC) authorized the first electronic exchanges, computer trading programs have become commonplace.12 As a result, the vast majority of all trades in the United States occur by way of computers using complicated algorithms to buy and sell stocks in nanoseconds, making oversight extremely difficult. These computer programs are designed to trade staggering amounts of stocks, bonds and other financial instruments at extreme speeds. Further, the programs take advantage of second-to-second fractional price shifts and market trends, providing new meaning to the concept of arbitrage.13
As the technology continues to develop, oversight becomes increasingly more difficult. A recent article in Wired magazine stated that one new computer chip built specifically for high-frequency trading will create a trade in .000000074 seconds, and there is a proposed $300 million transatlantic cable being built to shave 0.006 seconds off transaction times between New York and London.14
Interviewed in CNET magazine, James Arlen, a principal and information security consultant at a company known as Push the Stack Consulting, pointed out that an unfair market advantage may be created by introducing some weaknesses into a competitor's computer system.15 Arlen stated that, concerning the complexity of the financial markets:
It's highly likely or statistically likely that someone is abusing a market somewhere in the world. Will they be caught at any time in the short term? Probably not. That level of complexity makes it really hard to point a finger. This is going to be hard to find in the real world.16