With investors still counting the cost of
alleged $50 billion fraud, the scandal may have wide-ranging technology implications as regulators come under intense pressure to
on investment firms.
Madoff, the founder of Bernard L. Madoff Investment Securities, was recently charged with securities fraud in what SEC officials are describing as a multibillion-dollar "Ponzi scheme." With
now being asked about how the government repeatedly failed to notice the alleged scheme, it is almost inevitable that regulators will push for much greater visibility into financial firms' data.
Even the SEC itself has admitted that it needs to get its house in order. In a startling mea culpa, the commission's outgoing Chairman Christopher Cox acknowledged the SEC's shortcomings, describing "multiple failures over at least a decade" related to the Madoff case.
With President-elect Barack Obama's appointment of Mary Schapiro as
this week, there is clearly a political desire to see the financial sector more effectively policed. The incoming president, for example, again reiterated his desire to make financial regulatory reform a top priority for his administration.
"There's going to be more oversight, and I can't imagine that technology won't play a part in it," said Rob Ayoub, program director for network security at technology analyst firm Frost & Sullivan. "You're going to see a much more wide-scale focus on data mining and data analytics to catch some of these things."
The analyst explained that government regulations, although not necessarily specifying the technologies, often have major implications for firms' IT infrastructures. The Sarbanes-Oxley legislation, for example, forced many firms to rethink their data handling and storage capabilities.
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
, 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
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.
Clients apparently could either input their orders to the firm's trading room electronically or by making a telephone call.
Madoff also claimed to possess "one of the most sophisticated disaster recovery facilities found anywhere in the securities industry." In addition to its offices in Manhattan, the firm maintained a fully equipped facility near LaGuardia Airport, according to its cached pages.
Some news reports, however, claim that Madoff issued only sparse paper reports to his investors, despite his company's supposedly state-of-the-art IT systems.