Posted on: Sunday, September 21, 2003

Instant messages offer clues on fraud

By Elliot Blair Smith
USA Today

For the first time, investigators digging into a major Wall Street trading scandal will have a new chain of evidence at their disposal: the instant-messaging records of licensed brokers and dealers.

State and federal investigations of illegal trading practices in the mutual fund industry have put that evidence in the spotlight.

Former Bank of America broker Theodore Sihpol, who was charged Tuesday with grand larceny and securities fraud for allegedly executing after-hours mutual fund trades, worked for a bank that is a large subscriber of instant messaging services.

The bank also is among the growing number of U.S. companies that archive instant messages, or IMs, to satisfy stricter regulatory requirements, according to FaceTime Communications, which sold the bank IM-auditing software licenses for each of its 130,000 employees.

Government investigators and the bank refused to discuss the expanding mutual fund probe. But in recent months the New York Stock Exchange and Nasdaq began requiring that all IMs exchanged between member firms and customers be retained for three years just like written correspondence and e-mails.

White-collar fraud investigators rely heavily on electronic proof. In December, regulators fined five Wall Street firms $8.3 million for failing to preserve e-mail communications.

Next month, the SEC will begin requiring that public accounting firms also retain all electronic communications associated with company audits, although lawyers argue about whether IM is included in that rule.

The regulatory environment tightened after government investigators examining Enron found that energy traders used cell phones and instant messages to bypass employer surveillance of their desk phones and e-mail.

Now, Enron investigators fear they are missing part of the evidentiary trail they need to bring cases against alleged market manipulators, according to a high-level federal investigator.