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SEC Automating System To Catch Online Fraud,
Raising Privacy Worries

By Marcy Gordon   Associated Press
WASHINGTON — Federal regulators, on the lookout for phrases such as "get rich quick," are creating an automated surveillance system to search Web sites and message boards for investment fraud.

But a major accounting firm says it won't participate because the Securities and Exchange Commission's new system might encroach on the privacy of innocent people using the Internet.

The technology in the enhanced SEC surveillance program "is equivalent to, in my opinion, wiretapping ... the equivalent of planting a bug," said Larry Ponemon, a partner in charge of privacy issues at PricewaterhouseCoopers, one of the world's largest accounting and consulting firms.

The firm was among 107 companies invited by the SEC in January to bid to operate the system. It told the market watchdog agency it did not wish to participate because of privacy concerns and possible violations of the Constitution's protections against unreasonable search and seizure.

"It's a search and seizure issue," Ponemon said Tuesday in a telephone interview.

The SEC says it will not gather e-mail messages or other communications unless they appear in public online forums and will throw away any collected information that doesn't indicate wrongdoing. The agency said Tuesday that Internet chat rooms will not be covered by the new surveillance system.

"Privacy issues are of long-standing importance to the commission and we pay close attention to the letter and the spirit of the law," said SEC spokesman Chris Ullman.

He said the new system, which would copy online material into a database to be analyzed by SEC investigators, "will mechanize what the commission now does by hand."

The SEC's project was first reported Tuesday in The Wall Street Journal. The newspaper noted that Internet titan America Online Inc., many of whose message boards and chat rooms are home to discussions of stock investments, prohibits anyone from harvesting information from them because of privacy concerns.

Consequently, AOL might oppose the federal agency's project, The Journal suggested. Spokesmen for AOL declined to comment to the newspaper, and AOL spokesman Rich D'Amato would not comment Tuesday.

"This is government spying on the innocent," said George Getz, a spokesman for the Libertarian Party. "It's no different than the police tapping everyone's phones just because someone might have committed a crime."

Ponemon praised the SEC's goal of beefing up its monitoring of the Internet for fraudulent investment activity. But he said other technologies could be used — notably electronic "cookies" that track personal activity online — that would respect constitutional boundaries and still be more effective than the SEC's current manual system.

Ponemon suggested that certain types of cookies would be less intrusive than the Web "crawler" called for in the SEC's project, which would scan the Internet for as many as 40 telltale words or phrases. A cookie is a small file that a Web site deposits on an individual's hard drive, often with a unique number that identifies the user's computer.

Marc Beauchamp, executive director of the North American Securities Administrators Association, noted the delicate balance between the government's need to pursue investment fraud and its duty to protect privacy.

Still, he said, "The crooks are using the new technology at hand and the cops need to use the technology to stay ahead of the crooks."

Internet fraud is proliferating in online junk mail, chat rooms and Web sites, with unscrupulous stock promoters anywhere in the world able to cloak themselves in anonymity and lure investors.

Last month, the SEC asked Congress for $150 million for enforcement and investor education for fiscal 2001. It has some 240 people prowling the Internet for scams.

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