The SEC Gets into the “Big Data” Business: Emerging Intelligence on the Office of Market Intelligence

The following post comes to us from Geoffrey Christopher Rapp, Harold A. Anderson Professor of Law and Values at the University of Toledo College of Law.  It is based on his recent article, “Intelligence Design: An Analysis of the SEC’s New Office of Market Intelligence and its Goal of Using Big Data to Improve Securities Enforcement,” which was published in the University of Cincinnati Law Review in Winter 2013 and is available here.

In my new paper, “Intelligence Design: An Analysis of the SEC’s New Office of Market Intelligence and its Goal of Using Big Data to Improve Securities Enforcement,” I discuss one of the new SEC programs launched in the aftermath of the Madoff scandal.  Then-Director of Enforcement Robert Khuzami announced the creation of the Office of Market Intelligence (“OMI”) on January 13, 2010.

Working alongside the SEC’s new Office of the Whistleblower, OMI would “triage and develop tips and leads and to get that information to the right people within the Division in real time,” according to its founding Chief, Thomas Sporkin.  Sporkin, now in private practice with Buckley Sandler, was an exceptional choice to lead this new office – he was considered a rising star when assuming the new position at age 42, and he comes from a storied SEC pedigree. “The Sporkin family is to SEC enforcement what the Manning family is to NFL football,” securities lawyer Russell Ryan told The Washington Post.

This isn’t the first time the SEC – or a federal agency – has reorganized internally and created new subdivisions in response to perceived failings.  The SEC’s failure to detect and address Madoff’s chicanery in spite of repeated tips and mounting credible evidence prompted both internal soul-searching and significant new legislation, including the adoption of “bounties” for securities fraud tipsters in the Dodd-Frank Act.  Nearly everyone expected – and time would confirm – that the new Dodd-Frank program would lead to a significant uptick in tips submitted to the SEC.  In part, OMI would serve as an initial clearinghouse and evaluation unit for such tips so as to address the agency’s augmented post-Dodd-Frank workload.

This also isn’t the first time that the federal government has been involved in “intelligence.”  Founding Fathers George Washington, John Jay, and Benjamin Franklin, were among the nation’s first “spymasters.”  The critical role of intelligence in World War II helped transform intelligence and create the modern Intelligence Community (“IC”).  The horrific attacks of September 11, 2001, spurred even traditionally law-enforcement oriented federal agencies, like the FBI, to create their own intelligence units.

The SEC is rather late to this party. The creation of OMI was perhaps spurred by the creation of a similar unit at FINRA – the Office of Fraud Detection and Market Intelligence – in 2009, and responded to calls from influential SEC observers for a new approach to fraud detection.  In 2009 Professor Langevoort argued that “the SEC needs to turn itself into a Financial Intelligence Agency that uses more effective ‘on the ground’ surveillance tools to understand emerging risks to investors in the financial markets and securities industry.”

So how did the SEC do?  Of course, it’s too soon to tell.  There have been some reports of success by the new OMI, but also some criticisms.

Most importantly, I argue in my paper, the SEC should learn a valuable lesson from the federal intelligence experience of the military, national security agencies, and the FBI.  Intelligence is a process, not a “thing.” It must be driven by a cyclical approach to planning, collection, interpretation, and assessment, not by the availability of shiny new tools, no matter how cool they may look when deployed.  The “intelligence cycle” gives an intelligence activity its discipline and its focus, and is essential for ensuring that an organization’s intelligence function helps achieve desired long term outcomes.