Slashdot Mirror
Could Crowdsourcing Help the SEC Detect Fraud?
An anonymous reader writes "The SEC failed to catch Bernie Madoff largely because they are understaffed (a fact the SEC itself has admitted), under-funded, and simply lack the resources to adequately investigate his activities. Undoubtedly, there were other smaller incidents of fraud that have gone unpunished because of this deficiency. To solve this egregious issue, NERA Economic Consulting proposed crowdsourcing, the concept behind Wikipedia's existence. Proving financial fraud is essentially an exercise in finding numbers that do not match. Through crowdsourcing, regulators would make financial data publicly available to the masses, who would do the 'grunt work' of sifting through them to find discrepancies. But would it work?"
The SEC doesn't stop fraud because it doesn't want to stop it, not because it lacks the resources.
The SEC would still require more workforce because they need to evaluate the feedback from the crowd which can be tedious if you consider the quality.
How can the SEC hide behind the fig leaf of being understaffed when "As early as 2001, the media had quoted financial professionals who raised questions about Madoff's fund. In 2005, independent fraud investigator Harry Markopolos sent the SEC a memo raising 29 red flags -- he had complained about Madoff to regulatory officials for six years." It is very apparent that enough red flags were raised but they were ignored ... this smacks of connivance. .. question is will anybody take any action on the same ? Their track record speaks otherwise ..
So what if the "crowd" finds some anomalies in accounts
Insight into much, Influence over nothing !
As Wikipedia has shown, it's pretty easy for a small group of people to convincingly alter supposed factual information. In this particular case, the people most interested in manipulating the numbers are the same people who would most likely participate in the project (again, see Wikipedia). Those who are the most neutral or impartial are less likely to participate.
... and then they built the supercollider.
This much is obvious - the more transparent an institution, the easier it is for outsiders to find fraud or other problems. Where privacy is not an issue, I wholeheartedly support making as much data as possible available (in analysis-friendly formats) to as many people as possible. Data.gov is a great initiative. On the other hand, while it is good to open things up to fresh air and external review, blindly trusting on "the crowd" to do your work for your poor, understaffed self does not sound like due diligence. The key word in the title is "help". Staff professionals are expected to pick the most promising traces and do full investigations that lead to prosecution. With more transparency, public opinion will hopefully badger them on if they falter.
The article itself talks about moderation systems that allow the crowd to separate wheat (real cases of fraud) from chaff. In many crowdsourcing initiatives, a bad moderation system has resulted in a swamp of duplicate suggestions and some great internet humor, but little of actual value. A worse risk is that of concerted action by special interest group minorities, which could bury findings considered "negative" by group members and bolster those that furthered the group's agenda, giving this agenda a false legitimacy by appearing to come from "the crowd".
Let me coin a phrase.
Not only did the SEC fail to notice Madoff, they failed to react to people who reported Madoff. So, it seems to me the real problem here isn't one that can be solved by crowdsourcing, unless vigilantism counts.
When information is power, privacy is freedom.
"Of course, individuals from crowds can make false and erroneous claims. However, the beauty of crowdsourcing is that if a claim is indeed true, a large number of people would repeat and validate it, which would give the claim prominence and credibility." So they want to rely on thousands of people with no financial training to balance the books? If people rely on H&R Block to do their taxes do you really think they can spot "irregularities" in this massive amount of data? If they're collecting the data they can simply have the computers do it.
Er, yes, this is one way opening the data could work. Just because it's "crowdsourced" doesn't mean the crowd doesn't get to use computers.
I fail to see how the parent could be labelled "Troll" when its entirely true - Wikipedia has been gamed by multiple special interest groups. The crowdsourcing model is an abject failure.
Harry Markopolos did not suggest this sort of approach, but the polar opposite: expertise in the SEC with examinations to get in, a good rate of pay, the funding of whistleblowers through the confiscation of ill-gotten gains from fraudsters.
Tubby or not tubby. Fat is the question
They weren't lying when they said they were hard at work every day.
"When information is power, privacy is freedom" - Jah-Wren Ryel
The SEC failed to catch Bernie Madoff largely because they actively ignored and hide numerous well formed and filed complaints and warnings about his fraudulent activities.
So no, it probrably wouldn't work.
-Rick
"Most people in the U.S. wouldn't know they live in a tyrannical state if it walked up and grabbed their junk." - MyFirs
Any highly advanced incompetence is indistinguishable from corruption.
You can't handle the truth.
Back then, they didn't have a system for listening to public info like this. I know, I know, all the brilliant geeks on Slashdot think they could have run it perfectly like everything else but let's put that aside for a second and consider reality. In reality with a big bureaucracy it is difficult to get things done when you don't have a system for it. Just the way it goes. So one of the first parts of this change would doubtless be creating a method for people to submit reports, and a method internally for dealing with that.
In fact, that might be part of what is leading to this. The SEC said "You know, we really fucked up on this Madoff thing and there was a guy who noticed it a long time ago and tried to tell us. Maybe we should set something up so people like him can comb over what is going on and submit reports to us to process."
It is actually possible for people and organizations to learn from their mistakes.