SEC's Net-snooping

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From: Antoun Nabhan (
Date: Fri Mar 31 2000 - 08:05:10 PST

This came via Wired's columnist Declan McCullough's Politechbot list, but
it was written by the Libertarian Party and actually presents a pretty
balanced picture of the unresolved legal issues.

The things that the SEC currently does to monitor the markets for fraud and
insider trading are already very spooky. They maintain a huge database of
people who might be insiders at various companies or - and this is one
freaky part - have professional or personal connections with insiders. They
also use pattern-recognition algorithms to detect unusual and possibly
fraudulent trading behaviors. They've literally found and indicted waiters
who traded after overhearing company officers talking about market-moving
events at dinner. Securities lawyers to whom I've spoken are all pretty
much of the opinion that the SEC has an omniscient ability to figure out
which traders are naughty and which are nice.

It's unsettling to think that they might apply this same ability over the
domain of the Internet instead of just the domain of market clearing systems.


>2600 Virginia Avenue, NW, Suite 100
>Washington DC 20037
>World Wide Web:
>For release: March 30, 2000
>For additional information:
>George Getz, Press Secretary
>Phone: (202) 333-0008 Ext. 222
>Let's pull the plug on the SEC's
>automated Web snooping scheme
> WASHINGTON, DC -- A plan by the Securities and Exchange
>Commission to scan the Internet for "suspicious" words and phrases --
>and maintain a secret database of the results -- is an electronic
>"stop-and-frisk" that will treat innocent Americans like financial
>felons, the Libertarian Party warned today.
> "Under this plan, anything you say electronically can and will
>be used against you in a government database," said Steve Dasbach, the
>party's national director. "The SEC says it has 'zero tolerance' for
>financial fraud, but this proposal proves that the commission has zero
>tolerance for privacy, Constitutional protections, and the concept of
>being innocent until proven guilty."
> This week, the SEC admitted that it was in the process of
>creating a multi-million-dollar surveillance system that will
>automatically scan websites, Internet message boards, and online forums
>for language that could indicate financial or stock fraud.
> The SEC's automated web "crawler" would search for up to 40
>words or phrases like "get rich quick" or "make money now," collect the
>e-mail addresses and names of people posting such messages, and then
>store that information in a database for possible investigation and
>civil action.
> Such a surveillance scheme is allowable, argued SEC assistant
>general counsel George C. Browne, because "the Constitution doesn't
>give people the right to use the Internet to commit fraud."
> But, countered Dasbach, "The Constitution doesn't give the
>federal government the right to scoop up information about individuals
>without reasonable suspicion of wrongdoing, and dump that information
>in a secret database without their knowledge or consent."
> Libertarians oppose the SEC scheme for several reasons, he
> * It secretly monitors the lawful actions of millions of
>innocent Americans in an effort to catch a few crooks.
> "A basic premise of American law is that you are innocent until
>proven guilty," said Dasbach. "Under this SEC plan, you could be
>monitored and investigated without any search warrant, suspicion of
>wrongdoing, or criminal charges. For example, if you mention on an
>Internet forum that you bought a government lottery ticket in an effort
>to 'get rich quick,' you could be tagged by the SEC as a potential
> * It may constitute an unconstitutional "search."
> "The law is murky on this topic, because the courts have not
>decided exactly what the Internet is, or what constitutes a digital
>search," admitted Dasbach. "Is it like a telephone, in which case the
>SEC would need a warrant to spy on you? Or is it like a discussion in a
>public square, in which case the SEC can eavesdrop at will? But given
>the government's long history of violating civil rights and privacy,
>Libertarians would argue that the Internet deserves the most robust
>Fourth Amendment protection possible -- and the SEC's plan deserves
>zero tolerance from the courts."
> * It may violate the federal government's own Privacy Act.
> "Under the Privacy Act, Americans have the legal right to
>correct false information about themselves in a government database,"
>noted Dasbach. "But under this SEC plan, you won't be informed that
>information has been collected about you and put into the SEC's
>investigative database. You could be in their files as a potential
>financial felon -- and not even know it."
> For all these reasons, the SEC should scrap its automated
>snooping scheme, said Dasbach.
> "SEC bureaucrats should pull the plug on this automated
>webcrawler, and let it crawl off and die," he said. "Instead of spying
>on innocent Americans who want to get rich quick, this high-tech
>surveillance scheme should get canceled quick."
>Version: 2.6.2
>>Date: Fri, 31 Mar 2000 09:30:50 -0500
>>From: Gabrielle Herderschee-Hunter <>
>>Declan, you may have already seen this SEC news release, but just in case
>> The Securities and Exchange Commission today filed a complaint
>> charging Fred Moldofsky, a self-described day trader residing in
>> Houston, Texas, with securities fraud for posting a fake press release
>> related to Lucent Technologies, Inc. ("Lucent") on a Yahoo! Finance
>> message board. The complaint alleges that Moldofski posted the fake
>> release, which purported to announce a quarterly earnings shortfall,
>> more than 20 times on March 22 and March 23, 2000. The complaint
>> alleges that Moldofsky violated Section 10(b) of the Securities
>> Exchange Act of 1934, and Rule 10b-5 thereunder.
>> In a related action, Moldofsky was arrested on charges of securities
>> fraud contained in a criminal complaint filed by the United States
>> Attorney for the Southern District of New York and the United States
>> Postal Inspection Service. United States v. Moldofsky, 00 MAG 0622.
>> That complaint is based on the same conduct.
>> The Commission's complaint alleges the following:
>> ^ During the afternoon of March 22, Moldofsky posted several messages
>> using the alias "kahuna_and_the_brain" reporting rumors that Lucent
>> would not meet quarterly earnings projections.
>> ^ In the evening of March 22, Moldofsky posted a message using the
>> alias "hot_1ike_wasabe" with the headline "LUCENT RELEASES EARNINGS
>> WARNING!DAMN!" The text of that message purported to be a copy of a
>> Lucent press release announcing that it would not meet analysts'
>> earnings estimates for the quarter ending March 31, 2000. In fact,
>> Lucent had issued no such release.
>> ^ Beginning at 7:56 that evening and continuing through the end of
>> the morning on March 23, Moldofsky reposted that press release 20
>> times using the alias "F1oydian_us." Moldofsky had created that alias
>> that day. It was designed to resemble a screen name used by a
>> frequent commentator on the Lucent message board, who historically had
>> expressed a positive view of Lucent stock. The reposted messages bore
>> a variety of lurid headlines emphasizing the disastrousness of the
>> news and/or the genuineness of the release.
>> ^ While he was posting and reposting the fraudulent press release,
>> Moldofsky posted additional messages using other screen names that
>> commented on the release or on the poster's conduct.
>> ^ Lucent stock closed on March 22 at $62.625, down $2.625 from the
>> opening price that day. On March 23, Lucent opened at $62.125 and
>> traded as low a $60.375 before the fraudulent press release was
>> disavowed.
>> The complaint alleges that Moldofsky violated Section 10(b) of the
>> Securities Exchange Act of 1934, and Rule 10b-5 thereunder. It seeks
>> an order permanently restraining and enjoining him from future
>> violations of those provisions, as well as civil penalties.
>> # # #
>>Gabrielle Herderschee-Hunter
>>601 Indiana Avenue NW, Seventh Floor, Washington DC, 20004
>>phone: 202-639- 0580, fax: 202-639- 0587
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