Financial fraudsters beware: You can't use new digital technology to hide your crimes. The Securities and Exchange Commission is on to you.
The SEC's recently launched Cyber Unit, which the agency rolled out in September, is starting to show serious results. In late January, as Forbes reports, the SEC "obtained a court order halting an allegedly fraudulent initial coin offering (ICO), which targeted retail investors to fund what was claimed to be the world's first 'decentralized bank.'" The cryptocurrency operation was no small outfit — organizers claimed to have raised $600 million, Ars Technica reports.
The Cyber Unit, which focuses not just on digital securities fraud and currencies, but a range of technologically sophisticated financial crimes, uses a mix of high-tech IT and old-fashioned detective work to spot alleged crimes, according to Robert Cohen, the unit's chief.
SEC Mixes Tech and Investigating with Cyber Unit
The kinds of crimes the Cyber Unit investigates range from market manipulation schemes involving false information spread through electronic and social media to hacking to obtain material nonpublic information, and violations involving distributed ledger technology and initial coin offerings. The unit also will tackle misconduct perpetrated using the dark web, intrusions into retail brokerage accounts, and cyber-related threats to trading platforms and other critical market infrastructure.
Over the past several years, the SEC notes, its Enforcement Division "has developed substantial expertise in the detection and pursuit of fraudulent conduct in an increasingly technological and data-driven landscape." The Cyber Unit is designed to consolidate and advance those efforts and includes staff from across the Enforcement Division.
Cohen, a 13-year veteran of the SEC who was previously co-chief of the agency's Market Abuse unit, another specialized unit focused on trading, tells Federal News Radio that his team has about 30 people scattered throughout the national SEC offices. The team is made up of staffers who either have expertise in cybertrading and detecting fraud or who want to develop those skills.
According to Federal News Radio, the Cyber Unit collects and stores large sums of trading data and then uses algorithms to target and track suspicious behavior. Cohen tells Federal News Radio that despite the Big Data and analytics aspects of the unit's work, making cases involves traditional law enforcement tactics — talking to witnesses in person, collecting documents and standard analysis.
"Once we find something that looks suspicious, it's really old-fashioned investigating to really know whether somebody is doing a trade to do something illegal or whether it's just a legitimate trade that an algorithm triggered," he says.
"We certainly [also] get tips from whistleblowers, referrals from other agencies and other types of tips," Cohen says. "We also follow the market and especially things like the new initial coin offering market."
Cohen says one of the most promising tools the unit has deployed thus far is a program to track crypto-payments. "So, when somebody is getting paid to do something illegal, not in dollars or some other normal currency, but in digital currency, we have tools to try and track those payments," he tells Federal News Radio. The Cyber Unit has also developed some of its own software to identify suspicious trading and continues to work with other agencies to develop more expertise in cybersecurity, according to the publication.
Unit Uncovers Financial Crimes in Digital Currency
The Cyber Unit has been busy demonstrating its impact over the last few months.
On Dec. 4, the SEC announced the Cyber Unit's first case. The agency said it had obtained an emergency asset freeze to halt a fast-moving initial coin offering fraud that allegedly raised up to $15 million from thousands of investors since August by falsely promising a 13-fold profit in less than a month.
The SEC filed charges against a recidivist Quebec securities law violator, Dominic Lacroix, and his company, PlexCorps. The agency alleges that Lacroix and PlexCorps marketed and sold securities called PlexCoin on the internet to investors in the U.S. and elsewhere, claiming that investments in PlexCoin would yield a 1,354 percent profit in less than 29 days. According to Fortune, the ICO process "offers a way for startups to raise money outside of traditional investment channels," but "can be exploited by charlatans flogging phony get-rich-quick schemes."
A week later, on Dec. 11, the SEC announced that, as a result of the Cyber Unit's work alongside the SEC's Complex Financial Instruments Unit, a California-based company called Munchee Inc., which had been selling digital tokens to investors to raise capital for its blockchain-based food review service, had halted its initial coin offering after being contacted by the SEC. The company agreed to an order in which the SEC found that its conduct constituted unregistered securities offers and sales.
And in late January, the Cyber Unit was involved in an investigation that resulted in a complaint that alleges that a company known as AriseBank "used social media, a celebrity endorsement and other wide dissemination tactics to raise what it claims to be $600 million of its $1 billion goal in just two months."
The SEC alleges that AriseBank and its co-founders Jared Rice Sr. and Stanley Ford "offered and sold unregistered investments in their purported 'AriseCoin' cryptocurrency by depicting AriseBank as a first-of-its-kind decentralized bank offering a variety of consumer-facing banking products and services using more than 700 different virtual currencies."
AriseBank claimed that it developed an algorithmic trading application that automatically trades in various cryptocurrencies, according to the SEC. The agency alleges that AriseBank "falsely stated that it purchased a Federal Deposit Insurance Corporation-insured bank, which enabled it to offer customers FDIC-insured accounts, and that it also offered customers the ability to obtain an AriseBank-branded Visa card to spend any of the 700-plus cryptocurrencies."