Is The SEC Intercepting Your Instant Messages?

In the aftermath of Galleon, the SEC is aggressively ramping up its enforcement techniques, and while we all know that the regulators, in "joint venture" with the Justice Department, are likely eavesdropping on every single telephonic conversation originating or terminating in a financial firm, it is likely that Mary Schapiro has finally realized that some time in the 90's a thing called instant messenger became quite popular and that the bulk of traders and analysts converse not so much via phone but by Bloomberg MSG and IM blasts, as well as via all sorts of other discrete electronic communication tools. And this may be precisely what Robert Khuzami is targeting now as the Galleon net continues to expand ever wider to even what were formerly considered untouchable stalwarts of the hedge fund community.

An article by Securities Industry News highlights the desire of the SEC to finally, with much pomp and circumstance, enter the 21st century.

The use of wiretaps and recordings of conversations to help underpin
the insider trading case against the Galleon Group hedge fund struck
legal experts as unusual, for an investigation involving the Securities
and Exchange Commission.

“It is unusual,’’ said Robert S. Khuzami, the director of
enforcement at the S.E.C., at a discussion of hedge fund regulation at
the Practising Law Institute in New York Monday. But, a year from now,
“I hope it’s more common.’’

And here is why AOL may need much more than just a rebranding campaign to have its instant messenger product be used again on Wall Street:

But don’t be surprised if more creative techniques involving the
capturing of electronic messages or other evidence are used as the
S.E.C. tries to step up its game, in the wake of the
multibillion-dollar Ponzi scheme run by Bernard L. Madoff and other
fallout of the two-year-old financial crisis. Prosecutors built their
case against former Bear Stearns Cos. hedge-fund mangers Ralph Cioffi
and Matthew Tannin around e-mail messages.

Aside from merely going thru millions of lines of chit chat interspersed with some "hot tips" here and there, the SEC seems to be really revamping its operations.

While the “very large majority of (hedge) funds run their operations in
a lawful and proper manner,’’ the commission’s enforcement division has
set up three national groups to investigate possible violations in:

• Asset Management – Focusing on issues ranging from disclosure to
  misappropriation involving investment advisors, investment companies,
  hedge funds and private equity funds.
• Structured and New Products – Focusing on the lack of
  transparency in complex derivatives and financial products, with
  particular attention paid to new instruments.
• Market Abuse – Focusing on large-scale market abuses and manipulation
  perpetrated by institutional investors and market professionals.

And one last concept that the SEC seems to be taking offense at, are the marking shenanigans that occur on a daily basis through practically all buy (and sell)-side firms.

Monday, [Khuzami] also noted that “real-time records” will likely be looked
for, in cases involving how investment firms come to value assets they
hold.

This may actually be one of the biggest benefits of SEC's overhaul as it would prevent such SNAFU's as the Goldman-AIG CDO marking saga, where the two firms differed over the value of CDO collateral by over 20%. When you are talking billions in notional, this action may just prevent Goldman from brandishing its too big to fail colors any time it disagrees with a potentially risky counterparty over collateral valuation in the $25 trillion CDS market.

Comments

[bugs_]

For the more paranoid IM user it may
be a good idea to read the terms and
conditions of your IM provider.  If
you do you may discover that your
messages are not your property - they
become the property of the IM provider.

Text is easily compressed and storage
is cheap.

Messages generally transit through a
central server and it is not peer to
peer.

Many corporate firewalls will log all
email and IM traffic.  It is safe to
assume that IRC is as well.

[Anonymous]

ARPANET: now we know everything.

[Yossarian]

I think it's ridiculous that the perp walks seem to almost entirely revolve around hedge funds.  Now, don't get me wrong- these shenanigans should be prosecuted, but the real culprit behind this financial crisis is not a hedge fund insider trading; the real crimes were done inside the old established institutions: banks, IBs, FNM/FRE, Rating Agencies, and even the pension funds that were buying this junk.  This is a farce if these are the only types of financial actors that take the heat. 

[Anonymous]

The Big Thieves hang the Little ones.

[darkpool2]

forget the offshore tax havens, its the offshore server heavens now

[Sancho Ponzi]

Don't forget the 85 Broad St/200 West St exemption.

[Anonymous]

Actually, all communications are easy to monitor on all work related computers. Storage, processing power, and equipment are cheap. It's just the people and data searching that is difficult. Luckily, all you have to have is a google search engine application (pretty yellow box) and you are off to the races. Just remember, if it is on a corporate system, it is not your personal and private communications as it is on your company hardware and software. Per previous legal lawsuits, any and all communications on a corporate network have no expectation of privacy. Cheerfull thought.

[Cognitive Dissonance]

I fully expect the NSA, CIA, FBI and Homeland Security to take the same attitiude regarding all your "personal" communications. Oh wait, that's already been done.

Please ignore this message and return to your prime time indoctrination and programming already in progress. 

[trillionaire]

If you want to see how easy it is to intercept IMs, download wireshark and have it capture port port 1863 for MSN instant messenger.  Your boss / ISP / government can do this at will.

[martinprice]

There's a SecureIM plugin available for the Miranda IM client.  Of course, the mere existence of an encrypted IM conversation is likely to attract unwanted attention.

[Rollerball]

Telecoms were captured with 9/11.  You can run but you can't hide.

[lizzy36]

if that doesn't stop you from using email, im or the like, than at least get the recipient's address right. 

But, NO ONE, and we mean NO ONE has had a worse email gaffe than John X did about an hour ago. The Cornell Business School Tech Consultant managed to pass on his entire long and very steamy exchange with his mistress, Lisa (another Cornell Business Employee), TO THE ENTIRE JOHNSON SCHOOL. Both are married. Click below for the entire email exchange, including photos of the two. It seems like a joke, but we assure you, this is real life, folks, and it’s not pretty.

http://guestofaguest.com/news/breaking/breaking-the-email-scandal-that-just-shook-cornells-campus/

[Anonymous]

Mary Shapiro is aware of instant messenger.

Broker dealers have been required to monitor and archive their emails and IMs for a while now. They also have to prove that they monitor electronic communications to the SEC examiner (or, really, the SRO). They're strict about it and if you don't do it, it's a finding.

Why a private investment partnerships (which is what hedge funds are) should be forced to submit to government surveillance is beyond me. What's next? Following you to the bathroom.

The reality is that insider trading isn't actually a big deal and the enforcement of this idiotic rule (which didn't even exist before the 1960's) costs more than any benefit we imagine we derive from it (which is none). Those of us who trade daily know how to deal with suspected insider trades and I see little point in making the market a little padded room so idiots can't hurt themselves. And after all that surveillance and paying an army of SEC guys to hunt down anyone who might trade on inside information, the charge almost never sticks.

Trading on inside information is legal. Trading on MATERIAL inside information is not. It's not always clear what is material and what isn't until the information is released to the market - as Galleon found out. Proving that a trader traded because he had insider information is very very hard. Not everybody is dumb enough to communicate over IM and email. And all this for what? To prevent people releasing material information to the market faster? Idiotic.