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Could Crowdsourcing Help the SEC Detect Fraud?

Soulskill posted more than 3 years ago | from the sure-couldn't-hurt dept.

Social Networks 148

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?"

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148 comments

F1rst G0ats3 (-1, Troll)

Anonymous Coward | more than 3 years ago | (#33213812)

http://goatse.fr/ [goatse.fr]

Wrong problem (3, Insightful)

Wonko the Sane (25252) | more than 3 years ago | (#33213816)

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

Re:Wrong problem (5, Interesting)

FriendlyLurker (50431) | more than 3 years ago | (#33214286)

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" [amazon.com] , interview NY Magazine 1970 [google.com] ) 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 [sec.gov] . Those get out of jail free cards just keep coming [wsj.com] 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 [usatoday.com] - 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 [cfo.com] . 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 (4, Interesting)

maxume (22995) | more than 3 years ago | (#33214514)

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

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

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.

Decades old fraud, new understanding... (0)

Anonymous Coward | more than 3 years ago | (#33214654)

Its been going on for decades, but only recently [traderstatus.com] is a small percentage of the public beginning to realize the true extent of the conflict of interest on Wall St.

Re:Wrong problem (0)

Anonymous Coward | more than 3 years ago | (#33215334)

33 year's after he wrote about the crime!

This shouldn't contain an apostrophe.

this arrangement of US society and it's laws

And neither should this.

Wrong problem (-1, Redundant)

Wonko the Sane (25252) | more than 3 years ago | (#33213818)

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

This sounds more like a job for a computer? (4, Interesting)

Gruturo (141223) | more than 3 years ago | (#33213822)

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.

Re:This sounds more like a job for a computer? (2, Insightful)

Anonymous Coward | more than 3 years ago | (#33214330)

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.

Re:This sounds more like a job for a computer? (1)

cacba (1831766) | more than 3 years ago | (#33214360)

FTA:

NERA recommended making information available so that the masses can match the numbers reported to the SEC, the numbers reported to clients, and the numbers disclosed by custodians, or financial institutions that hold the securities for investment advisors.

The goal is to check if all the numbers are consistent, if properly formatted this is easy for a computer. The problem is that the data isnt nicely formatted, so netflix = fail. Mandating a format is the way to go.

Re:This sounds more like a job for a computer? (1)

tmosley (996283) | more than 3 years ago | (#33215054)

We WOULD do that, but we're too busy watching tranny porn.

-Your Friends at the SEC

my life (0, Offtopic)

lawnboy5-O (772026) | more than 3 years ago | (#33213846)

I won't ask for forgiveness, my sins are all I have.

Incoming sopssa/odies/SquarePixel trolling ... (0)

Anonymous Coward | more than 3 years ago | (#33213848)

sopssa = SquarePixel = odies. Three (possibly more) sockpuppets, one stupid troll. Remember it moderators!

Peace out!

himalayan (-1, Offtopic)

graica15 (1876062) | more than 3 years ago | (#33213858)

Acoustical, or acoustic tile is used in building construction to maximize the quality of sound produced in the area where the tile is installed. This product may also reduce unwanted sound transmission coming from outside. himalayan [himalyanacoustics.com]

Would it work? (4, Informative)

raddan (519638) | more than 3 years ago | (#33213860)

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

F(tfs)FY (4, Insightful)

RingDev (879105) | more than 3 years ago | (#33214836)

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

Re:F(tfs)FY (1)

DragonWriter (970822) | more than 3 years ago | (#33215252)

Well, if the problem is, as suggested, that the SEC actively ignored and hid well-formed and filed complaints and warnings about his activities, one would think that this might work. With more data publicly published, it becomes much harder for the SEC to hide anything. They can, of course, still ignore complaints, though politically, the more of the supporting information that is exposed to the public, being analyzed in the public, and being commented on in the public, the less politically viable ignoring it becomes.

No: the market is crowd sourcing. (4, Interesting)

sgt101 (120604) | more than 3 years ago | (#33213886)

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!)

doesn't solve the problem (2, Insightful)

Anonymous Coward | more than 3 years ago | (#33213888)

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.

this will never work (1)

Thud457 (234763) | more than 3 years ago | (#33214810)

The SEC would have to listen when people report problems [cnn.com] .

Re:this will never work (1)

b4dc0d3r (1268512) | more than 3 years ago | (#33214998)

And instead of 1 report to ignore, you have a thousand to ignore. The SEC needs to fund itself solely through the fines they collect, that will get them working. And fining punitive amounts instead of symbolic ones.

Ah, priorities. (1)

blcss (886739) | more than 3 years ago | (#33213900)

The government spends money like drunken sailors, yet somehow law enforcement is underfunded. How does that happen?

This sounds... (1)

mewshi_nya (1394329) | more than 3 years ago | (#33213906)

... like a really bad way to fix this problem.

Seriously, with the exception of number nerds, who's going to take a look at the numbers?

Call me skeptical... (0)

Anonymous Coward | more than 3 years ago | (#33213910)

... but it seems like the article lost me at this point:

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. Social news sites like Digg, with their “up-vote” and “down-vote” system, use a similar concept.

Voting systems can and will be gamed. If you are going to break the rules in a money game, you have no qualms about hiring voters to help bury your illegal activity.

fp (1)

sjs132 (631745) | more than 3 years ago | (#33213920)

At least they are not proposing that they need to get bigger. At least a step in the right direction for a government office. If it would work is another question and what about the privacy issues? Some people may not want it known that they lost millions in a scheme because it would show how stupid they were. Lots of people lost to B.M. some where higher ups... The problem was even when the SEC new there were irregularities, they still turned a blind eye to B.M. because he had friends and power. Corruption over looked by corrupt government regulatory agency? Now, btw, they are also exempt from Freedom of Information Requests, so who will ever really know what went on besides what they say???

Lies (4, Informative)

roman_mir (125474) | more than 3 years ago | (#33213924)

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 [msn.com]

more videos [youtube.com]

--

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 (0)

Anonymous Coward | more than 3 years ago | (#33214884)

Maybe you should have listended to Markopoulos when he described FINMA.

In short: SEC is incompetent (but not corrupt),
FINMA is corrupt to the core and only exist to cover up fraud.

Re:Lies (3, Insightful)

roman_mir (125474) | more than 3 years ago | (#33214990)

Any highly advanced incompetence is indistinguishable from corruption.

Re:Lies (1)

DragonWriter (970822) | more than 3 years ago | (#33215302)

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.

Crowdsourcing means they get whatever kind of people are present in the public that are concerned about the issue. That would seem to mean two people:
1. Competitors scrutinizing each other,
2. Concerned citizens that understand the field scrutinizing everyone.

Group #2 may consist of some people who would otherwise seek employment at the SEC, but if your characterization is correct, its not who the SEC would employ.

So, I think crowdsourcing would, in fact, address the problem you raise with the KIND of people they have, even assuming, for the sake of argument, that that complaint is valid.

Too much work load? (5, Funny)

ffreeloader (1105115) | more than 3 years ago | (#33213926)

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.

Re:Too much work load? (1)

dreadlord76 (562584) | more than 3 years ago | (#33215148)

Why was this moderated funny? This was happening for real!

Homework? (1)

duk242 (1412949) | more than 3 years ago | (#33213930)

Could I crowd source my home work?

Too much work? (0, Redundant)

ffreeloader (1105115) | more than 3 years ago | (#33213940)

Maybe they would be behind if they actually worked. You know, come to work and actually do their jobs rather than watching porn,

Re:Too much work? (2, Insightful)

GameboyRMH (1153867) | more than 3 years ago | (#33214476)

They weren't lying when they said they were hard at work every day.

Nice excuse (0)

Anonymous Coward | more than 3 years ago | (#33213942)

Government agencies will always "admit" to being understaffed. "Oh, we admit that we need more cash" is quite a useful "admission", no?

Using Madoff as an example of understaffing is extra rich, as they were essentially served the case on a platter by a concerned citizen who had done the due diligence himself (on multiple occasions, natch).

I call BS (0)

Anonymous Coward | more than 3 years ago | (#33213946)

Wasn't there a guy out there trying to get the SEC to look into Madoff for like 10 years because the numbers didn't make sense?

How about employing more people? (1)

F-3582 (996772) | more than 3 years ago | (#33213952)

I suppose that every Dollar you invest in tax law enforcement should return thousand-fold its value.

Better question... (0)

Anonymous Coward | more than 3 years ago | (#33213954)

The corporate shenanigans are overwelmingly dwarfed by our government's congressional shenanigans!

How about "Could Crowdsourcing Help the Electorate Detect Congressional Shenanigans?"

For a while, until the interest wears off (1)

JBL2 (994604) | more than 3 years ago | (#33213960)

Might work for a while, but probably not longer term. "Available" doesn't mean "looked at," so anyone who might get caught will probably be OK until they irk someone who knows about the program.

Crowd surfing... (0)

Anonymous Coward | more than 3 years ago | (#33213966)

Didn't yesterday /. have the trouble Digg has with this style of thing?

How would it work? (1)

dangitman (862676) | more than 3 years ago | (#33213972)

It sounds like this would be highly vulnerable to gaming. It's pretty easy to twist numbers to imply anything. The people who would be most interested in participating in such a scheme would probably be those who are also the most interested in 'cooking the books.' The impartial are probably not going to participate.

Too much work? (0, Redundant)

ffreeloader (1105115) | more than 3 years ago | (#33213980)

Maybe they would be keeping up with their workload if they were, you know, working rather than watching porn. I mean, if things are so lax that recording porn on an everyday basis for extended periods of time happens what are the non-porn-addicts doing with their time? Just surfing the web? Sleeping? Who knows when there is no supervision and it's blatantly obvious that no one cares what the employees are doing?

Apparent Contradiction in the Article (5, Insightful)

CalcuttaWala (765227) | more than 3 years ago | (#33213982)

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 ..

Re:Apparent Contradiction in the Article (1)

aicrules (819392) | more than 3 years ago | (#33214344)

Because that's pretty much what you do in as a government entity. If you do your job and succeed, ask for more funding to do even more, better work. If you fail, blame it on understaffing to try to get more funding. If you don't do great but don't do horrible, try to get more funding to help "push the fight in the right direction".

Well that would be the first part of this (2, Insightful)

Sycraft-fu (314770) | more than 3 years ago | (#33215200)

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.

Re:Apparent Contradiction in the Article (1)

rev_sanchez (691443) | more than 3 years ago | (#33215330)

I agree that the crowd idea won't work until there is the political will to actually enforce these rules. Even in the best of times you have too many regulators looking for a way into the industry they're regulating (like the oil rig inspectors at the MMS) but when you combine that with leadership that doesn't believe in government regulation then things are so much worse.

When the Madoff matter started to look fishy message from the leadership in Washington was that lax enforcement was the way to achieve the deregulation they were looking for and that makes perfect sense from a political point of view. You don't get money for reelection from people you hound with regulators and people who don't believe in government, or at least believes that government regulation generally does more harm than good, shouldn't be expected to run one well.

bet it will work (1)

kubitus (927806) | more than 3 years ago | (#33213988)

there are nuff small - and not so small people who would like to deliver those crooks!

lulzimfirstufag (-1, Troll)

Anonymous Coward | more than 3 years ago | (#33213990)

A crowd detected, sourced, and frauded yo momma last night.

Bitch.

Fraudulent catching of fraud (4, Interesting)

dkleinsc (563838) | more than 3 years ago | (#33213994)

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.

Re:Fraudulent catching of fraud (1)

drjoe1e6 (461358) | more than 3 years ago | (#33214658)

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.

You left off "5. Profit!!!"

That's my fear as well. Greed would be one possible motivation. What about personal vendettas or blackmail? If an individual can submit info that brings a CEO or company down, even for a short time, there really should be some accountability in the system.

Re:Fraudulent catching of fraud (1)

b4dc0d3r (1268512) | more than 3 years ago | (#33215214)

You'd have to cover your short way before the SEC even opened an official investigation, and way way way before it announced it was opening one. Also, the crowdsourcing reports would probably be about as available as various bloggers and whistleblowers today. Lots of people do pump-and-dump or schemes to temporarily drop prices, and they are usually prosecuted.

Mostly because they gamed the rich people, and rich people don't like that, so of course they are caught. The SEC doesn't want to anger its future leaders so it doesn't usually jump on fraud unless its an outsider gaming the system. You might disagree with part of this, but try a pump-and-dump or short hoax and see how fast you're in jail.

How about... (0)

Anonymous Coward | more than 3 years ago | (#33214000)

actually PAYING people to do work? The problem isn't that the government doesn't have the money to hire more staff at the SEC. The problem is that our government would rather waste money on bailing out public unions as a big thank-you for their election-year support.

Huh? (1)

zoomshorts (137587) | more than 3 years ago | (#33214004)

Would this not expose a ton of data that should remain secure?

Everyone has what it takes to write a wiki page... (0, Redundant)

e065c8515d206cb0e190 (1785896) | more than 3 years ago | (#33214014)

... on their favorite topic. Not to mention the will to do so.

Not everyone has the skills to check complex accounting files. I guess incentives need to be setup here. In at least one big developed country (is it the US or Japan? I can't remember) a member of a cartel has an incentive to speak up and will see its sentence reduced as it helped bust out other members. It's worked in the past (and for a big cartel). Such incentives are the only way to guarantee that people will actually do the job and help.

To Mrs Shapiro: give me a couple grand, send me your files and I'll read them!

FraudVille! (0, Offtopic)

Anonymous Coward | more than 3 years ago | (#33214022)

Sure, it would work. Let Zynga put it up on FaceBook as a mindless clickfest waste of time. People will flock to it.

"Oh no! My '07 quarterly reports need watering!"

How would it work? (1, Insightful)

dangitman (862676) | more than 3 years ago | (#33214024)

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.

Re:How would it work? (2, Insightful)

DiamondGeezer (872237) | more than 3 years ago | (#33214464)

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.

Tenses are hard (0)

Anonymous Coward | more than 3 years ago | (#33214026)

Good thing we had editors.

Sunshine laws (0)

Anonymous Coward | more than 3 years ago | (#33214028)

Call it "crowdsourcing" if you want to use your newfangled terminology, but this is basically just a sunshine law. Nothing new, everything good.

Does this really have to be crowdsourced to peopl? (1)

CoffeeDog (1774202) | more than 3 years ago | (#33214040)

I don't know much about finance (IANACA) but wouldn't "an exercise in finding numbers that do not match" be something a computer could do rather easily and quickly to even large amounts of data?

Probably not as well as they might hope (2, Interesting)

Zocalo (252965) | more than 3 years ago | (#33214050)

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.

Re:Probably not as well as they might hope (1)

dcollins (135727) | more than 3 years ago | (#33214910)

"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?"

Totally amateur observation is that stocks in a particular industry tend to move together, and if one drops or gets investigated you tend to have a sympathy movement as people wonder if the problem is endemic to the whole industry. So that would be generally not something most businesses would want to trigger. Right?

Re:Probably not as well as they might hope (1)

twoallbeefpatties (615632) | more than 3 years ago | (#33215218)

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.

I don't know if you were being facetious or not, but I actually like that idea. We can't exactly rely on these companies to police themselves, but maybe they could be convinced to police their competitors. That would create some actual antagonism in the process. The greater danger would be that the banks and investors would create a gentlemen's agreement not to point out any corruption to the regulators for fear of mutually assured destruction.

Everyone can write a wiki page.... (0, Redundant)

e065c8515d206cb0e190 (1785896) | more than 3 years ago | (#33214056)

... on their favorite topic. And a lot of people have the will to do it.

Not everyone is ready to go through complex accounting files, nor has the skills to actually do it. One needs to setup proper incentives is this is to work. In an OECD country (not sure which one), a member of a cartel who goes clean with regulators will see its sentence waived as it helps bust out other cartel members. It's very efficient and there have been successful outings in the past.

To Mrs Shapiro: Send me a couple grand, accounting PDFs and I'll read through them! Otherwise, no thanks, I'm busy.

The potential for meta-fraud (1)

dkleinsc (563838) | more than 3 years ago | (#33214074)

Consider this possibility if you will:
1. Short sell a stock.
2. Pay off some crowdsourcers in China or some other foreign nation where law enforcement is a bit lax to submit info that makes it look like an otherwise sound company is engaged in some flim-flam, which will cause the SEC to start investigating.
3. Watch the stock drop as people find out about the SEC investigation.
4. Cover your short, and possibly even buy up some extra.
5. Watch the stock go up as people find out that the SEC has dropped its investigation due to a lack of any real evidence.
6. PROFIT!!!

Sounds like an opportunity... (1)

nlvp (115149) | more than 3 years ago | (#33214076)

...to create a "secure" IT gateway between confidential submissions to the market authorities and the general public, which can then be downloaded to a DVD by some employee wanting to "look at it at home", which is then accidentally left lying around in a car somewhere shortly before billions of personal financial transactions end up in a file torrented on the PirateBay with edited highlights providing Julian Assange with another headline.

Yes, transparency can help detect fraud (2, Insightful)

tucuxi (1146347) | more than 3 years ago | (#33214086)

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 [slashdot.org] , but little of actual value. A worse risk is that of concerted action [slashdot.org] 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".

Blowback? (1)

AHuxley (892839) | more than 3 years ago | (#33214098)

Recall http://mps-expenses.guardian.co.uk/ [guardian.co.uk] "U.K. newspaper The Guardian, which published online 700,000 expense claims by members of the U.K. Parliament" and http://news.slashdot.org/story/09/06/19/0152259/Newspaper-Crowdsources-700000-Page-Investigation-of-MP-Expenses [slashdot.org]
End users could be given forms with details removed and look for the classic 'straight lines'
eg."If you look at his performance, it was a straight line up"
http://www.investmentadvisor.com/Issues/2009/January%202009/Pages/More-Regulation-PostMadoff.aspx [investmentadvisor.com]
Anything of interest could be noted. The main issue would be an elite backlash, their trusts and generational insider trading would have to be protected.

fraudsourcing? (2, Insightful)

syntheticmemory (1232092) | more than 3 years ago | (#33214114)

Let me coin a phrase.

Too much work? (1)

ffreeloader (1105115) | more than 3 years ago | (#33214120)

You gotta be kidding me. Understaffed? Only because no one is actually working. If there are employees who are allowed to surf porn the majority of work day then discipline is so lax that very little is getting done. Sure, not everyone is surfing porn, but it's for sure there are checks on how much work someone is getting done. There is zero accountability.

"We admit that we need more money" (1)

Logic and Reason (952833) | more than 3 years ago | (#33214130)

Of course the SEC would "admit" to being understaffed and underfunded, regardless of the actual cause. That's how you get Congress to throw more money at you.

And this is how a new profession is created... (1)

c0lo (1497653) | more than 3 years ago | (#33214140)

... the one that would be called "competition financial analyst"... given that it took quite a small effort to de-anonynimize a trivial "search log", I wonder how hard would it be to do the same with financial records of companies (which, I reckon, would show a higher regularity/better identifiable patterns). Once this is done, what an invaluable source of info to see on what the competition is spending money (not that this would help much... I mean, knowing better how your competition is spending money doesn't necessary mean that the CEOs would now better about the businesses they themselves manage).

Problem is LISTENING to the crowd... (4, Insightful)

Jah-Wren Ryel (80510) | more than 3 years ago | (#33214150)

Not only did the SEC fail to notice Madoff, they failed to react to people who reported Madoff. [thedailyshow.com] So, it seems to me the real problem here isn't one that can be solved by crowdsourcing, unless vigilantism counts.

This fixes it? (1)

Gr33nJ3ll0 (1367543) | more than 3 years ago | (#33214152)

Sounds incredibly boring and not very useful. The SEC had multiple people come forward and report Bernie Madoff for fraud long before they decided to punish him. What going to fix that?

Sure, if that was their purpose (1)

FriendlyLurker (50431) | more than 3 years ago | (#33214154)

Looking at recent history, the SEC does not appear to want to detect fraud, at least where it counts.

Some NYSE specialists were charged with fraud: Richard Ney and economist who later turned actor, wrote a best selling book in 1970 ("The Wall St Jungle" [amazon.com] , interview NY Magazine 1970 [google.com] ) 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 SEC and Department of Justice 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 [sec.gov] . Those get out of jail free cards just keep coming [wsj.com] 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 [usatoday.com] - 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 [cfo.com] . 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 DOJ.

If ever there was an example of the lack of credibility for the SEC, this is it. 33+ years of massive fraud in full public view, but the DOJ 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.

I want the money! (1)

zarthrag (650912) | more than 3 years ago | (#33214156)

It's gonna take a bounty to get me to stare at a bunch of weird numbers. I'd like a bounty. Six figures, please.

Wrong in the summary (1)

andy1307 (656570) | more than 3 years ago | (#33214158)

because they are understaffed (a fact the SEC itself has admitted), under-funded, and simply lack the resources to adequately investigate his activities

Harry Markopolos [wikipedia.org] did all their work for them but they simply refused to investigate because they had a cozy relationship with Madoff.

Why should I? (1)

treczoks (64329) | more than 3 years ago | (#33214162)

Croudsourcing might be a nice idea in general when dealing with vast problems and patterns, but what is the reward?

When I write an article for *pedia, I "scratch an itch" or increase the worlds' knowlege (well, at least the enthropy...). When I do somethink like Seti@Home, its for science.

But why should I waste my time by sifting through financial numbers? To help reducing the risk for the rich to get richer?

for the lulz (0)

Anonymous Coward | more than 3 years ago | (#33214164)

sounds like another system for 4chan to raid and game for the lulz

of course it would (1)

onyxruby (118189) | more than 3 years ago | (#33214174)

I used to work large balance fraud for a living in my previous career. I think fraud is typically pretty easy for a human to bust. There are certain kinds of things that can and should be easy to catch. There's. No harm and I think the proof has now come to show how much damage fraud can do.

Information like that would be a treasure trove for educating the public

FP (0)

Anonymous Coward | more than 3 years ago | (#33214182)

test

This fixes it? (1)

Gr33nJ3ll0 (1367543) | more than 3 years ago | (#33214184)

This sounds boring, useless, and a huge buzzword heavy distraction. The SEC had multiple people coming forward for many years before they prosecuted Bernie Madoff, I'm sure some of these people had proof. How is this any different from what they're claiming to do. Instead it sounds like a lazy buricrates way of getting his boss off his back. SEC Fraud Guy: "Hey Boss, lets *crowdsource* it!" Boss: (I don't know what that is) "Sure! And here's a nice raise!"

The problem was not lack of discrepancies (0)

Anonymous Coward | more than 3 years ago | (#33214190)

SEC investigated investigated several cases, just not one of the biggest fraud cases ever about which they had been warned several times.

Discrepancies had been found, but not acted upon. It seems to be a matter of messed up priorities more than anything else.
Crowdsourcing won't fix that.

Watchdog 'ignored' Madoff warning{s}
http://news.bbc.co.uk/2/hi/business/7786923.stm [bbc.co.uk] ...
It has been revealed the SEC received warnings about Wall St figure Bernard Madoff almost 10 years ago, in 1999. ...
The SEC chairman said he was "gravely concerned by the apparent multiple failures" of SEC staff to look into claims about Mr Madoff.

Mr Cox said: "Credible and specific allegations regarding Mr Madoff's financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of SEC staff, but were never recommended to the commission for action." ...

No, it would not have helped (1)

fluch (126140) | more than 3 years ago | (#33214196)

SEC was explicitly alarmed by H. Markopolos on November 7th, 2005, that the world’s largest hedge fund is a fraud. The original 19 pages paper can for example be seen here:

http://www.scribd.com/doc/9189285/Markopolos-Madoff-Complaint [scribd.com]

This paper tells straight that Bernie Madoff was committing fraud. Crowd sourcing would never have helped here as SEC was just refused to accept the evident proof of Madoff's wrongdoing.

I heard the first time about this paper in a talk given by Prof. Paul Embrecht. His very interesting talk notes can be found here: http://www.actuaries.org/ASTIN/Colloquia/Helsinki/Presentations/Embrechts.pdf [actuaries.org]

"Admissions" (1)

bsDaemon (87307) | more than 3 years ago | (#33214200)

Whenever someone would gain from people believing what they're saying, I think its more along the lines of an excuse than an admission. Or misdirection. The SEC saying "we need more people, and thus more money" is the same thing as Kim Jong Il "admitting" he doesn't have nuclear weapons to keep inspectors and/or invaders out. If the employees they have now would do their jobs rather than look at pr0n on government time and just build contacts until they can get jobs with major financial institutions helping them avoid the SEC, then this would likely would not have been an issue in the first place.

3500 employees is Understaffed??? (1)

zapster (39411) | more than 3 years ago | (#33214202)

More like they just weren't doing their job. Surfing for porn all day is not in the SEC charter.
http://abcnews.go.com/GMA/sec-pornography-employees-spent-hours-surfing-porn-sites/story?id=10452544

Madoff==Affinity Con Writ Large (1)

LaminatorX (410794) | more than 3 years ago | (#33214218)

Madoff got away with it for so long, despite warnings to the SEC, because he was quite literally beyond reproach. His respected standing and reputation as a financial mastermind from his heyday as a NASDAQ bigwig inclined those with oversight to write off the occasional warning bell as the complainer (or the regulator himself) being unable to fathom the financial kung-fu of the master. Of course, in his later years he only looked so good because he was cheating. I sometimes wonder if he started down that road to fill a void left after the tech bust deflated the NASDAQ, that he still needed to feel and be treated like the captain of finance he once was.

That being said the resources, tools, and staff of the SEC have not kept pace with the growth of their mandated realm of oversight. This is true of many regulators, but the SEC especially so.

Bad idea (2, Interesting)

clang_jangle (975789) | more than 3 years ago | (#33214234)

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..

Mass hysteria? (2, Insightful)

wbhauck (629723) | more than 3 years ago | (#33214242)

"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.

Premise is total B$ (1)

moeinvt (851793) | more than 3 years ago | (#33214274)

"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."

What a crock of pure BULLSHIT that statement is!

The SEC, and all of the other law enforcement agencies of the Federal government failed to catch Madoff and the other 10,000 crooks and fraudsters in the financial industry because they willfully and deliberately refuse to do their jobs. This guy, Harry Markopolos handed Madoff to the SEC on a silver platter repeatedly over the course of several years:

http://www.businessinsider.com/2008/12/busting-bernie-madoff-one-mans-10-year-crusade [businessinsider.com]

As more evidence as to the mindset of our Federal government regulators, the FBI was talking about an "epidemic of fraud" in the mortgage industry as early as 2004, yet refused to act.

http://www.huffingtonpost.com/william-k-black/the-two-documents-everyon_b_169813.html [huffingtonpost.com]

The Federal government is NOT interested in applying the law to the politically well connected elites. Laws only apply to little people. We have the FBI, SEC, FDIC, OTS, OCC, and FRBs all with a mission to regulate various parts of the financial industry. However, most of the employees, from the Treasury Secretary on down are either former industry execs, or want to become industry execs after their government careers.

All of the whistle-blowing, crowd sourcing, blatant evidence of crime, etc. is TOTALLY USELESS when the government actively participates in the frauds and refuses to enforce the existing laws. That's why the whole "financial reform" bill is a joke as well. Write more laws and hire more regulators not to enforce them.

I'm really hoping that we get some whistle-blowers in the financial industry sharing data with wikileaks. The Feds won't do anything about it, but I want the people to know the full story of how the financial industry, with the full cooperation of the Federal government, raped the people of the U.S.

Beware vindictive clients of honest morons (1)

hotdiggity (987032) | more than 3 years ago | (#33214276)

From the article:

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. Social news sites like Digg, with their “up-vote” and “down-vote” system, use a similar concept.

Not to stroke Slashdot's ego, but I think a meta-moderation system is a better model. A financial institution may remain honest but piss off a lot of vindictive people who can click "Digg this". Whereas a small set of competent savvy number-crunchers may dispassionately find the clues needed to identify a fraud, with far more reliability. I believe they may underestimate the amount of noise that will come from investors who lose a lot of money from a perfectly honest, if incompetent, financial advisor.

There's also no mention in the article of financial compensation models for the crowd - except for the word "volunteer" halfway down the article. I'm not sure if this system would be better with cash rewards or not.

"What's in it for me?" (1)

tverbeek (457094) | more than 3 years ago | (#33214364)

Wikipedia works because people enjoy showing off what they know. I'm not sure that motivation would apply to sifting through accounting figures.

Fraud? No problem! (1)

elrous0 (869638) | more than 3 years ago | (#33214404)

I suggest you start with every major corporation in the United States. Then you can move on to every politician they "lobby" (aka bribe).

So we could detect fraud and... (0)

Anonymous Coward | more than 3 years ago | (#33214470)

...cure insomnia worldwide at the same time! I'm all for it.

Crowdsourcing already doesn't work (Groklaw) (4, Interesting)

wowbagger (69688) | more than 3 years ago | (#33214512)

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.

Yeah that'd help (1)

nedlohs (1335013) | more than 3 years ago | (#33214804)

Given the SEC ignored detailed reports from various members of the public that Madoff was running a scam, I'm sure sending them more such reports (of lower quality from people with less experience in the relevant fields) will help greatly.

Campbell's Law (1)

dcollins (135727) | more than 3 years ago | (#33215016)

Crowdsourcing works nicely for things like open-source software and encyclopedias because the whole project is of limited scope, it's predicated on Samaritan-like communal giving, and generally no one can profit one way or the other from particular responses or pieces of writing. This probably breaks down and becomes unstable if participants can profit one way or the other from particular outcomes. i.e., Campbell's Law:

"The more any quantitative social indicator is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor."

http://en.wikipedia.org/wiki/Campbell%27s_Law [wikipedia.org]

SEC bounties ? (1)

Yvanhoe (564877) | more than 3 years ago | (#33215034)

Of course it can, especially combined with the new bounties on successful whistle-blowing : http://community.nasdaq.com/news/2010-08/whistleblower-law-could-payout-millions-for-tips-on-fraud.aspx?storyid=31840 [nasdaq.com]
That is at least $100,000 for you if the damages reach the lilliputian amount of 1 million dollars. I have seen dumber hobbies for interns at big companies...

Who cares about the SEC? (1)

khallow (566160) | more than 3 years ago | (#33215048)

I want something to help me detect fraud. The SEC might or might not do something, but it remains my responsibility to manage my money. If crowd-sourcing works, I'd use it for sure as would millions of other investors.

Like CAPS at Fool.com (1)

dgower2 (1487929) | more than 3 years ago | (#33215184)

If you're familiar with the CAPS community at www.fool.com, you'll understand the concept. Make the records/numbers public and start ranking the individual screeners by their credibility - if they're right more often, their input gets more weight. People that provide innacurate analysis will be ranked less significant.

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