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.
Why have people do this instead of developing a sufficiently accurate / sophisticated algorithm to spot these things in the first place. Not some simple code which monitors few obvious indicators and that anyone can work around - something which really correlates and analyzes all the available data. Plus, tools to make the human verification of the flagged accounts a lot faster and easier, so they can check thousands in a week.
Hell, anonymize data for 1000 past frauds and 49000 non-frauds, put the thing online and issue a public prize a la netflix challenge.
Vacuum cleaners suck. Kings rule.
Maybe. Better than the current system, at least, considering that this guy was sounding alarms about Bernie Madoff more than 10 years ago.
Crowd sourcing is fine for finding out what people in general think, but that's the problem : it reflects what the mass of people think and know.
When specific data becomes available to investors they generally act on it pretty fast, unless it goes against the wisdom of the crowd in which case it gets ignored until the evidence becomes overwhelming. So - we have a very motivated form of crowd sourcing at the moment that isn't doing the job.
The way forward is to change the rules on disclosure, and to change the penalties for fraud. In particular to make the top 50 pay packets in all limited companies partnership packets. If executives had unlimited personal liabilities for one year, 90% in the second year and so on after accepting a top 50 position in a year then I would bet that fraud in organizations and between organizations would decline rapidly. Also, put a tax on goods from any company that is based in a territory that doesn't enforce this practice (or all the execs will go live in Hong Kong or somewhere!)
--------------------------------------------- "In the end, we're all just water and old stars."
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.
Lies lies lies lies lies lies lies. Don't believe a word of it, not a single one.
SEC failed to catch Bernie Madoff because the system is corrupt, they have enough people, the problem is what KIND of people they have. You can increase their manpower by a factor of a million and if they still get the kind of people they have there now, they will not end up catching any Madoffs.
Madoff case is so outrageous: Harry Markopolos is the whistle-blower who uncovered Bernie Madoff's Ponzi scheme 10 years before the rest of the world learned of the biggest financial crime in history. ...
It was exactly as I had warned the government of the United States approximately $55 billion earlier. And as I stood in the lobby of that dojo, my sense of relief was replaced by a new concern. The piles of documents I had in my possession would destroy reputations, end careers, and perhaps even bring down the entire Securities and Exchange Commission (SEC), the government's Wall Street watchdog -- unless, of course, the government got to those documents before I could get them published. I grabbed my kids and raced home. - go to this link, there is a video there
more videos
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Don't believe the hype. It is not about not having enough people, it is the system that exists that is completely captive, the SEC needs to be disbanded for corruption.
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But I am libertarian, I don't actually care about some people losing their money because they are stupid, I am more concerned that government is part of the corruption scheme and it is helping the thieves.
You can't handle the truth.
Maybe they wouldn't be behind in their work if they actually did the work. You know, work rather than watch porn during working hours.
"while democracy seeks equality in liberty, socialism seeks equality in restraint and servitude." de Tocqueville
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 !
Imagine this scenario:
1. Short sell a stock.
2. Submit apparently crowdsourced information that would prompt the SEC to investigate the company.
3. Stock drops like a rock due to the SEC investigation.
4. Cover your short before anyone can figure out that there's nothing to investigate.
I am officially gone from
At least that would be my guess. This seems like it would be very similar in practice to the open source maxim that many eyes make all bugs shallow. It works very when someone has a problem and people who understand code then have an idea where to start, but comparatively few people are prepared (or able) to take source code and methodically check it line by line for flaws. That number is further reduced when you deduct those who would then use that knowledge to further their own ends without disclosing it. I doubt that there enough people who are both suitably skilled and prepared to spend their time trawling through a company's finances in the hope of finding evidence of fraud to make this idea work.
On the other hand, it is a dog eat dog world out there in the world of finance and investments; I can envisage some banks and trading companies might actually employ people to do this kind of thing full time. Why bother trying to out perform a competitor if you can find enough evidence of possible fraud (well founded or otherwise!) and subject them to a detailed investigation by the SEC or some other regulatory body? Come to think of it, it could be the next growth centre for those countries who specialize in staffing call centres and other such cheap labour body shops.
UNIX? They're not even circumcised! Savages!
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.
If the SEC is underfunded and understaffed then how the heck do they expect to deal with the avalanche of false positives by idiots who think they're qualified to participate? The SEC should get its funding directly from the businesses they're supposed to regulate. A flat percentage of gross corporate income, no doubt a fraction of a percent would be plenty enough.
Libertards complaining that corporations deserve a free ride on the backs of real citizens in 3..2..1..
Caveat Utilitor
"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.
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
Consider a company that has filed for chapter 11 reorganization. Said company is consistently MONTHS late with their theoretically mandated-by-the-SEC filings. A large number of people publicly call attention to this fact, over and over again, stating that according to the SEC rules said company should not be allowed to trade stock - not on the pink sheets, not on the major exchanges, NOT AT ALL. Yet, the company continues to trade.
I would assert this demonstrates that crowdsourcing has already been tried, and the SEC's (lack of) actions in this matter demonstrate it won't work.
www.eFax.com are spammers
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
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.