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U.S. SEC's newest enforcement weapon: powerful software

Source: Wed, 26 Feb 2014 15:13 GMT
Author: Reuters
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In this 2012 file photo, a woman waits for an elevator in the foyer of the Fort Worth Regional Office of the Securities and Exchange Commission (SEC) in Fort Worth, Texas REUTERS/Mike Stone
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By Emily Flitter

NEW YORK, Feb 26 (Reuters) - The U.S. Securities and Exchange Commission is beefing up its capacity to detect insider trading and other illegal activity by engaging with Palantir Technologies, a software company originally set up to help foil terrorists, according to people familiar with the matter.

The SEC has embarked on a multi-year deal, worth more than $13 million, to use Palantir to help the agency crunch massive amounts of data, the sources said.

The closely held Palo Alto-California-based company was co-founded by Peter Thiel, the billionaire tech mogul who also co-founded PayPal, the online payment service now owned by eBay Inc. Palantir's software has its roots in technology that PayPal uses to detect fraudulent transactions, and it takes its name from a magical stone in J.R.R. Tolkien's epic "The Lord of the Rings" that can see things not immediately apparent.

Officials expect Palantir's platform to help the SEC find evidence of illegal activity more quickly and easily by linking trading records and personal contact information from paid databases with tips, complaints and referrals the agency has received, said the sources, who were not authorized to speak publicly about the matter.

The platform has been up and running for several months, but it is still being rolled out to full capacity throughout the agency, according to the sources.

Members of the SEC's Division of Enforcement are using the new technology to look for incidents of insider trading, pump-and-dump schemes in penny stocks, accounting fraud and violations of the U.S. Foreign Corrupt Practices Act, among other activities.

The agency is already using analytical models and algorithms developed in-house and run on software provided by SAS to find suspicious activity in stock trading and other activities it regulates. Palantir's contribution, according to the sources, is to strengthen the connections between different sets of data.

The SEC is one of a host of government agencies turning to "big data" to improve their detection of suspicious activity. Palantir works with other U.S. government agencies, including the National Counterterrorism Center.

A spokeswoman for Palantir declined to comment.

The new platform is designed to let people working in different divisions of the SEC more easily share discoveries about companies and people that could help lead to more cases.

Sofia Hussain, a senior forensic accountant in the SEC’s Enforcement Division in Boston, said pattern-recognition tools already have led to several new cases. The SEC has already been using analytical models and algorithms developed in-house to pick out suspicious activity in stock trading and other activities it regulates.

Palantir allows the SEC to compare the records of every trade made in a particular stock, along with the identities of those who made each trade, with addresses, phone numbers and other personal information from paid databases. That enables it to see more clearly relationships between all those trading in the same stock.

The trend toward big data in white-collar enforcement has reached the private sector, too. A new software vendor is selling technology to hedge funds, pension funds and brokerage firms that profiles traders, keeps track of their normal trading habits and reports any suspicious deviations.

The company, AIMPaaS, began marketing its software three weeks ago and is currently negotiating its first deal. Its co-founder, Leslie Seff, said the company is talking to large hedge funds. He said AIMPaaS software can be customized to change the threshold for suspicious activity, which is determined by changes in order size, trading venues and other features.

(Editing by Frank McGurty)

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