Securities and Exchange Commission officials propose to use technology to fight online investment fraud, but their efforts are drawing fire from privacy advocates who fear the program will have unintended consequences. The SEC is looking to battle investment schemes by creating a surveillance system that would prowl the World Wide Web for phrases like “get rich quick.” Such phrases are often attached to fraudulent online investment schemes. With the help of the surveillance system, SEC enforcers will be able to root out con artists efficiently, according to Chairman Arthur Levitt, who said the SEC already monitors the Internet for fraud, but does so now with human beings.
This automated search system, according to Levitt, will examine electronic material that is readily accessible to the general public, such as chat rooms, only. “This is no different, in manner and scope, than finding a newspaper article with the aid of a tool that helps you do so more quickly and exactly,” the chairman said in a statement.
Rhode Island's Market Has Changed. Developers, Builders, Investors and Sellers Must Change With It.
By Emilio DiSpirito IV License Partner | Engel & Völkers Oceanside Leader | The DiSpirito…
Learn More
But many groups would disagree. For example, PricewaterhouseCoopers was one of the firms that the SEC invited – through the Request for Proposals process – to bid on the project to create the surveillance system. The firm, however, declined, citing concerns that such a system would violate the privacy of Internet users. “We were invited to participate in a Request for Proposals (but) we declined to do so because of privacy concerns,” said Elizabeth Hunter, a PricewaterhouseCoopers spokeswoman.
Those concerns didn’t stop many other firms, however, as all the RFPs are in, an SEC spokesman said. He could not say how many the commission received, but he did say that the SEC intends to go forward with its plans after reviewing the proposals.
But several privacy advocates say they are concerned that the SEC will use the system to monitor private communications. Barry Steinhardt, associate director of the American Civil Liberties Union, said the ACLU wants to speak with the SEC to clarify exactly how the program would work., and whether it would violate privacy rights. He said it is too soon to say what the ACLU will do if it believes, after getting that clarification, that individual rights will be compromised. But litigation may be an option, he said.
”We’re very concerned about this,” Steinhardt said. “Scouring the Internet looking for communications is not something the government should be doing.”
Instead of searching the Internet, the SEC should be investigating fraud when it has evidence of it, he said.
But Levitt rebuts charges that the program would violate anyone’s privacy. In a statement, he said, “I want to make clear that the SEC has never had any intention of intercepting or monitoring private transmissions, including conversations taking place in chat rooms or on e-mail, in the pursuit of Internet fraud.”
The RFP requires that the firm the SEC contracts with will “access data posted or disseminated on publicly accessible Web sites and news and message servers,” Levitt said in a statement.
But while many dispute whether Levitt is attacking the problem the right way, few dispute that the problem of online investment fraud exists. For example, in July of last year the SEC brought and settled enforcement actions against two Internet companies that offered and distributed “free stock” through online Web sites without properly registering their offerings.
Charles White, a stock broker for the Providence brokerage firm Barrett & Co., said online con artists target unsophisticated investors who lack the knowledge to tell when information or investment opportunities are fraudulent. One of the more common schemes is the “pump and dump,” when investors make false statements about a given stock in an effort to artificially inflate its price. Once the price goes up, the con artist will sell the stock – before those who were fooled realize that hype is the only reason behind the stock’s rise.
Con artists who have shorted a stock – that is, bet that its price will fall – will also issue fake press releases that spread, damaging, false information about a company to get its stock price to drop, White said.
”They’re not targeting people who are sophisticated,” White said. But he added that an inexperienced investor might view a false message online and take it seriously. “To someone who’s a neophyte, they might take it as believable.”
To White, who advocates investing for the long-term, the way to inform yourself as an investor is through homework, not scanning chat rooms. Investors should be talking to the company’s investor relations department, reviewing its quarterly reports, and “Getting to understand the business,” he said. “That’s research.”
