Wall St. bloodhounds track IMs for clues
By Elliot Blair Smith, USA TODAY
For the first time, investigators digging into a major Wall Street trading scandal will have a new chain of evidence at their disposal: the instant messaging records of licensed brokers and dealers.
State and federal investigations of illegal trading practices in the mutual fund industry have put that evidence in the spotlight.
Former Bank of America broker Theodore Sihpol, who was charged Tuesday with grand larceny and securities fraud for allegedly executing after-hours mutual fund trades, worked in a unit of the bank that is a large subscriber of instant messaging services.
The bank also is among the small but growing number of U.S. companies that archive instant messages, or IMs, to satisfy stricter regulatory and supervisory requirements, according to FaceTime Communications, which sold the bank IM-auditing software licenses for each of its 130,000 employees.
Government investigators and the bank refused to discuss the expanding mutual fund probe. But in recent months the New York Stock Exchange and NASD began requiring that all IMs exchanged between member firms and their customers be retained for three years just like written correspondence and e-mails.
White-collar fraud investigators rely heavily on electronic proof. In December, regulators fined five Wall Street firms $8.3 million for failing to preserve e-mail communications.
Next month, the SEC will begin requiring that public accounting firms also retain all electronic communications associated with company audits, although lawyers argue about whether IM is included in that rule.
"It remains undefined," says Sullivan & Cromwell attorney John Bostelman.
The regulatory environment tightened after government investigators examining Enron found that Wall Street energy traders used cell phones and instant messages to bypass employer surveillance of their desk phones and e-mail. Now, Enron investigators fear they are missing part of the evidentiary trail they need to bring cases against alleged market manipulators, according to a high-level federal investigator.
Even so, investigators appear slow to grasp how widespread instant messaging systems have become on Wall Street and the extent to which these exchanges of information have replaced routine e-mail. IMs, unlike e-mail, are direct person-to-person communications that bypass a company's computer server unless special filtering software is installed to capture them.
IDC estimates that more than 400 million IM accounts will be created by 2004, nearly half of them connecting businesses and customers. One of the largest concentrations of instant messaging is on Wall Street, where IMs are used to distribute research, negotiate prices and even execute orders.
To date the SEC has cited IM in only two enforcement actions, both involving market manipulations by unscrupulous traders. The Justice Department views IM mostly as a cyberstalking tool allowing members of chat groups and IM services to anonymously track other online visitors.
Henry Carter, an attorney who consults on electronic communications, says he met blank stares when he briefed a New York Stock Exchange panel on IM compliance issues in early 2002.
"The regulators are always behind the curve, and the traders are zooming right past them," he says.
"Wait a minute, is that what my 13-year-old daughter uses at home?" Carter says an NYSE executive asked him. "I said yes — and your traders." |
