The Securities and Exchange Commission is now up against a growing amount of digital securities fraud. In September, the agency even created a new cyber unit as part of the enforcement division to tackle the issue, the unit chief said.
Rob Cohen, who has been with the SEC for 13 years, told Federal Drive with Tom Temin that it didn’t take long for his team to show positive results. Before taking on the role of unit head, Cohen worked as co-chief of the Market Abuse unit, another specialized unit focused on trading.
The team is made up of about 30 people scattered throughout the national SEC offices, and either have expertise in cyber-trading and detecting fraud or want to develop it. Cohen said the team is staffed with internal hires only, many also from the Market Abuse unit.
The SEC has experienced, in the last few years, a rise in digital trading, and the potential risks of fraud and cyber-abuse have also risen. Cyberspace has opened doors for hackers to attack anything from law firms to newswire companies for information.
“So we decided it was important to specialize in those specific areas and things like digital currencies, so that we can do the cases as well as possible,” Cohen said.
Digital currencies, such as emerging initial coin offerings (ICO) or digital tokens, open doors for businesses and investors to raise and save money in new ways. But it also opens a door to the dark side. In other words, cyber attacks.
Cohen outlined the Lacroix and PlexCorps case from last month that outlined suspicious behavior brought on by these companies using whatever was trendy to attract people and take their money. Portrayed as an alternative to stock, the digital currency was instead found to be a fraud raising up to $15 million from thousands of investors through false promises.
“We allege that this is an example … there was no real business behind this,” Cohen said. “It was really just a fraud to get people to turn over their money. We went into court to sue these individuals and got a court order to freeze their assets.”
He said not all ICOs are fraud necessarily, but despite emerging digital currencies, companies still have to follow the federal securities laws.
The unit collects and stores large sums of trade data and it is the job of the experts to then analyze that information using special codes to target suspicious behavior or patterns. Despite the initial use of computers and algorithms, Cohen said the process is still pretty basic.
“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 said.
Talking to witnesses in person, collecting documents and standard analysis is still as much a part of their job as relying on scanning tools and identity tracking data programs to bring their attention to suspicious activity in the securities realm.
“We certainly [also] get tips from whistleblowers, referrals from other agencies and other types of the tips,” Cohen said. “We also follow the market and especially things like the new initial coin offering market.”
He said one of the best tools employed by the unit 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,” Cohen said.
The unit has also developed some of its own programs to identify suspicious trading and continues to work with other agencies to develop more expertise in cybersecurity.