FBI uses social media to look for fraud

2012-11-26 17:14
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New York – The FBI sees social media as a potential breeding ground for securities fraud, and has agents scouring Twitter and Facebook for tips, according to two top agents overseeing a long-running investigation into insider trading in the $2 trillion hedge fund industry.

April Brooks, a special agent in charge of the New York field office of the Federal Bureau of Investigation, and David Chaves, a supervisory agent, said it is hard to predict the next wave of securities fraud, but they add that it will have a lot to do with advances in technology and social media.

"I will tell you technology will play a huge part, social media, Twitter. Any kind of technology that is new and doesn't exist today, if there is any way to exploit it, these individuals will exploit it," Brooks told Reuters TV in an interview for the Reuters Investment Outlook 2013 Summit.

Brooks and Chaves oversee what the FBI calls "Operation Perfect Hedge," which has led to more than 60 convictions of hedge fund traders, analysts and industry consultants.

Last Tuesday, a day after the Reuters TV interview, the government charged a former employee of Steven A. Cohen's SAC Capital, Mathew Martoma, with a $276 million insider trading scheme that prosecutors called "the most lucrative" ever.

While Cohen, whose $14 billion hedge fund is one of the most successful and best known on Wall Street, was not charged with any wrongdoing, the complaint says he signed off on trades in Elan Corp and Wyeth in July 2008 ahead of bad news about a clinical drug trial the companies were working on.

Brooks and Chaves gave no hints about the SAC case in the interview, and declined to talk about active investigations.

"Some view insider trading as reaching this crescendo, and we have reached a top. I would suggest we have not," Chaves said.

Investors embrace Twitter

Hedge funds, big institutional investors and investment research firms, such as Muddy Waters (@muddywatersre), have embraced Twitter as a platform for sharing their ideas and investment strategies.

On Nov. 20, PIMCO's Bill Gross tweeted via @PIMCO: "Bernanke confirms PIMCO's New Normal after 3 years! 2% economic potential at least for a time. Probably lower & longer Mr. Chairman."

Gross was referring to Ben Bernanke, chairman of the Federal Reserve, and PIMCO's portfolio positioning for what he calls a "New Normal" developed world economy - 2.0 percent real growth and 2 percent inflation.

"People have used Twitter as a powerful distribution mechanism, occasionally with meaningful market impact," said independent analyst Daniel Yu, who is an avid user of Twitter under the handle @LongShortTrader.

Studies and research reports have shown that Twitter can be used as an early indicator of changing investor sentiment around particular stocks and commodities. This allows Twitter data to be used to predict price fluctuations in the market.

One report, authored by academics Johan Bollen, Huina Mao and Xiao-Jun Zeng, says the degree of "calmness" of the Twitterverse can predict - with 87.6 percent accuracy - how the Dow Jones industrial average will move two to six days ahead of time.

Some hedge funds and other investors have criticized U.S. authorities for cracking down on insider trading to distract attention from the fact that law enforcement has not been able to bring any prosecutions against Wall Street bankers over the financial crisis.

Brooks and Chaves acknowledged the criticism. They said there is a desire to prosecute, but the laws are not there to criminalize actions that some think deserve to be punished.

"I wouldn't say we have missed opportunities," Brooks said, commenting on the 2008 financial crisis. "There may be others who are responsible, but who don't necessarily violate the federal statutes."

The two agents, who both work in the securities division of the New York branch of the FBI, said that when they meet with people on Wall Street, they explain there is no vendetta or campaign against the hedge fund industry. The insider trading investigation is simply part of an effort to make the markets more fair for everybody.

"The message is we are out there, and we are going to continue to be out there," Brooks said. "This type of violation, this type of crime impacts everyone."


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