Madoff Fallout Could Boost Tech Oversight

With the SEC coming under fire for its failure to spot Madoff's alleged fraud, Ayoub feels that government regulators could lay down stricter rules for how investment companies track and report, for example, what brokers are telling their clients.

"In a lot of these financial institutions, a lot of this information is digital. It's email and IM, but the challenge is pulling it all together," he says. "There's going to have to be audits and more checks and balances on the IT side."

Data-mining software, which trawls through large volumes of data, could become more widely deployed by financial firms, as could data-analysis software, which searches for complex patterns within different types of information.

Companies selling data-mining and analysis software include SAS, Siebel Systems, Oracle(ORCL Quote) and IBM(IBM Quote), which touts its DB2 database Intelligent Miner product as a way to quickly identify fraudulent activity.

As for specific details of the Madoff case, it is still unclear how much of the evidence is in electronic format, although officials have hinted that paper-based records feature prominently in their investigation.

In his statement Tuesday, SEC chairman Cox explained how officials and law enforcement agencies are now going through "vast amounts of records and information" on Madoff and his firm. "Progress to date indicates that Mr. Madoff kept several sets of books and false documents," he said, adding that Madoff provided false information to both investors and regulators.

Madoff Investment Securities' Web site, however, boasted of the firm's IT prowess, claiming to possess the "the securities industry's most advanced technology." Although the firm's site is now limited, a Google(GOOG Quote) cache of earlier pages describes the company's "sophisticated" order-handling technology, such as a "smart router" for accessing multiple points of liquidity. "Sophisticated computers are integral to every aspect of the firm's activities, from executing trades to clearing and settling them, from monitoring prices to identifying trading opportunities around the world," said the Web site.