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?"

Comments

Wrong problem

[Wonko the Sane]

The SEC doesn't stop fraud because it doesn't want to stop it, not because it lacks the resources.

Re:Wrong problem

[FriendlyLurker]

The SEC doesn't stop fraud because it doesn't want to stop it, not because it lacks the resources.

Exactly. For those who are not convinced, a bit of reading: Five New York Stock Exchange specialists were actually charged with fraud, but it's not the justice you think it should be. Richard Ney and economist who later turned actor, wrote a best selling book in 1970 ("The Wall St Jungle", interview NY Magazine 1970) with a few follow up books that all called out the NYSE Specialist families for fraud, explaining exactly how they defraud the public. At the time The Wall Street Journal boycotted anyone selling the NY times longest running best seller, and Ney was not permitted as a guest on The Tonight Show - very unusual at the time for someone with such a long run best seller/controversial book - his message had touched a raw nerve. In response, the establishment had Ney widely counter-attacked, labelled a conspiracy theorist nut at every opportunity - comments like "what would an actor know of the stock market" were common and can be heard even today.

To prove Ney's wild eyed grand conspiracy theory right - The DOJ finally got around to charging the NYSE specialists for the exact fraud that Ney described - 33 year's after he wrote about the crime! In 2003 the Specialist firms quickly got their get out of jail free cards for a tiny fraction of what they had actually defrauded over the years. Those get out of jail free cards just keep coming off the monopoly pile. The story does not end there however... news came out shortly after that the NYSE was at long last going to move to an all-electronic exchange - and that the Specialists firms charged with defrauding the public were the very same that had been blocking the move due to their 30% NYSE stake. Everyone in the know + those that read Ney's books knew all too well of the massive fraud going on in full public view for at least 33 years (more like 210+ years), but it was not until these Specialist criminals blocked other powerful interests that the illegal behaviour was actually pursued by the SEC/DOJ.

If ever there was an example of the lack of credibility for the SEC and DOJ, this is it. 33+ years of massive fraud in full public view, but they did not get around to prosecuting until it was ordered to - until it was necessary to coerce the Specialist family firms into letting the NYSE go electronic. Nothing to do with justice, or protecting the innocent being defrauded to the tune of billions of dollars over the decades. As an added insult, the DOJ let the criminals off the hook with a paltry fine. But then there is no surprise there, as Richard Ney said it best:

"Regrettably, the arrangements that exist to preserve the traditions and legalize the frauds of the security industry are inseparable from the general organization of a society controlled by the financial establishment, a society whose laws and principal customs have been contrived to serve the special interests of the financial community,"

Voting Red or Blue will not change this arrangement of US society and it's laws - merely reinforce it.

Re:Wrong problem

[maxume]

You're getting some good mileage out of that rant:

http://news.slashdot.org/comments.pl?sid=1697252&cid=32679752

The behavior talked about in the SEC link is certainly improper, but it is a little overboard to speak about it as if it is controlling society, each of the alleged fraudulent trades likely had a genuine market order on one side of it.

This sounds more like a job for a computer?

[Gruturo]

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.

Would it work?

[raddan]

Maybe. Better than the current system, at least, considering that this guy was sounding alarms about Bernie Madoff more than 10 years ago.

No: the market is crowd sourcing.

[sgt101]

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!)

Lies

[roman_mir]

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

--

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.

--
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.

Re:Lies

[roman_mir]

Any highly advanced incompetence is indistinguishable from corruption.

Too much work load?

[ffreeloader]

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.

Apparent Contradiction in the Article

[CalcuttaWala]

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.
So what if the "crowd" finds some anomalies in accounts .. question is will anybody take any action on the same ? Their track record speaks otherwise ..

Fraudulent catching of fraud

[dkleinsc]

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.

Problem is LISTENING to the crowd...

[Jah-Wren Ryel]

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.

Crowdsourcing already doesn't work (Groklaw)

[wowbagger]

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.

F(tfs)FY

[RingDev]

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