David Evanson and Hardeep Walia
Forbes.com, Fall, 2012
There were no corner offices in the famous “Lipstick” building where Bernie Madoff had his offices in Midtown Manhattan.
Still he managed to lurk behind a veil of secrecy. As forbes.com reported back in 2009, “He directed Cohmad [the securities firm partly owned by Madoff] employees to operate secretively. He barred them from using e-mail after 2006, the year he finally registered his own advisory business after avoiding it for decades. He told Cohmad employees not to refer any clients with finance backgrounds because they would ‘ask too many questions.'”
My question is this: If all of Bernie Madoff’s investors were connected through a social network, how long do you think the fraud could have gone on?
This is hardly a rhetorical question. Not in 2012, anyway, when securities fraud is rampant, and the Securities and Exchange Commission (SEC) is, despite the best of intentions, outgunned. By a lot.
Consider this: The total budget allocation for the SEC in 2012 is about $1.3 billion. That’s for pens, pencils, pocket protectors, staff and so on. By contrast, spending on technology alone by financial services companies was pegged at nearly $120 billion by information technology consultant Celent. Clearly the agency has its’ hands full. Or to quote Sean Connery in The Untouchables, “They’ve brought a knife to a gun fight . . .”
The obvious dangers of this aside, the less obvious danger is that many individual and institutional investors gain a false sense of security that the SEC is there to protect them. It certainly is, but as you can see by the numbers, they simply can’t keep up.
But there’s one tool still left in the arsenal of those who want to play by the rules and make money the old fashioned way: social media.
My feeling and my experience is that among individuals, investing is inherently a social activity. Investors talk. They ask each other questions. They swap tips. They offer a rationale for the merits of one investment over another.
And while historically, the social aspects of investing have taken place over the phone, through the mail, and face to face, increasingly there’s opportunities for them to take place on line. And not just by sounding off in a chat room. Social media networks provide the opportunity for complex and nuanced interaction. In fact, we’ve evolved to the point where social media can and should be integrated into investment products. That’s exactly what we’ve done with investment motifs – inexpensive and customizable portfolios of stocks – that also enable investors to bring discrete parts of their own social networks into their investments, and to find new social networks that share their interest in a particular stock (or stocks), or sector, or strategy.
Imagine for a moment if you will, every time you bought a mutual fund you were given a chance to join a network of other investors in the fund. Under those circumstances, how long could market timing abuses continue? How long could Allen Stanford have sold above average rate CDs to unsuspecting investors?
To get back to the numbers, with social media integrated into investment management and monitoring, the $1.3 billion the SEC has at its’ disposal to catch the bad guys can be levered up several orders of magnitude. By empowering investors with a simple tool, a social network, I believe we can all be better, safer investors.