A Legal Case Involving Business Fraud, Research Paper Example

Abstract

This paper summarizes a legal case involving business fraud and the use of the internet/computer systems.  The issue in question involved that of Anil Kumar a former Director of the global management consulting firm McKinsey.  ” He says he made $2.6m (£1.6m) giving inside market information to one of America’s richest men, Raj Rajaratnam.” (BBC News, 2010).

Insider Trading Fraud

The prosecuters in the case presented a list of crimes claiming that Mr. Rajaratnam had paid Kumar between $1.7 to $2 million for insider trading tips.  Kumar pleaded guilty to these charges of fraud.  He confessed to providing insider trading information to one of America’s richest men – Raj Rajaratnam.  It was alleged that Rajaratanam made in excess of $36 million from the tips that he was provided with.   The tips included details about emerging acquisitions including that of ATI Technologies and Advanced Micro Device.  The lawyer representing Rajaratanam stated ” An analysts prediction that AMD would acquire ATI was widely reported in the press more than 7 weeks before the acquisition was announced” (BBC News, 2010).

Rajaratanam was freed on $100m bail following his arrest in October 2009.  The charges prescribed stating he was responsible for a massive insider trading ring which involved Executives covering several large international US Corporations.   All told the charges covered 21 additional people including some of the biggest Information Technology firms, including both IBM and Intel.  The case is considered to be extremely complex involving at least two computerised insider trading networks.

This was another example of how cyber crime can be committed by moving important information around in real time.  Others were given access to secure networks and provided with tips on stock movements and potential speculative results on future mergers and acquisitions. ” Prosecutors said the Kumar plea provided another example of how the insider trading ring sometimes utilized information other than mergers and acquisitions tips.” (Neumeister, 2010).  Kumar was said to have betrayed his position of trust and professional integrity with McKinsey’s,  it was later stated by the prosecution that Kumar received considerable compensation for his insider trading tips to Rajaratanam.. ” Rajaratnam paid Kumar $1.7 million to $2 million for his tips, including a $1 million bonus after the ATI and Advanced Micro Devices deal was announced”  (Neumeister, 2010).

The legal case refrained from direct identification of the IT control deficiencies but a number of items became apparent. Information was easily passed on from the Trading systems to others by electronic data transfers.  Some information by verbal exchanges and others where shared access was gained.  Each of these represents a degree of compromise in the IT Control systems.  For example:

1. Shared access should not be allowed to any unauthorized persons. This may become difficult to monitor when Senior Executives commit crimes and provide secure access to others complicit in their illegal network activities;
2. The technology should not allow “screen scrapes” of information or the ability to download information to portable devices like USB drives that are easily concealed;
3. In live trading systems all users should be monitored by a central security systems and potential intruders should be shut out; equally outgoing data to external systems or users should be prohibited. Again this becomes complex when dealing with high level senior executives and client relationships.

The concept of insider trading and rogue dealers has been a major problem to the Capital Markets in the Financial World. Cyber crime is easy to exploit but the University of Sunderland in the UK are conducting research around new software applications that may help in the early detection and prevent frauds of this nature being committed. ” At the University of Sunderland, they are working on a new “smart computer” that uses artificial intelligence and “headline analysis techniques” to try and detect suspicious share dealing.”  (Fighting Fraud, 2009). The new system nicknamed CASSANDRA. The system essentially interrogates the stock market and provides information on trends and movements highlighting potential areas where merger and acquisitions may occur and as such be prime areas for either dumping stock or trading up ” CASSANDRA would be able to detect that based on its analysis of news events from Reuters, Bloomberg and other sources, as well as the movement of stocks and shares of a specific company”  (Fighting Fraud, 2009).

At an individual level people have become much more wary about the concept of cyber crime and identity theft.  ” Although Americans are increasingly adopting online channels for tasks such as banking, stock trading, and health management, nearly 60% say that the risks of identity theft have changed their online behaviours”  (Ramen, 2010).  People have become increasingly aware about the need for computer security and storing personal information on the computers hard drives.  Corporate Fraud, however takes on a whole different dimension  because of the scale and cost of the types of cyber crimes and fraud that can be carried out.  Legal precedent is also difficult in this area as we do not have a lot of established case law in which referral can be made, hence a lot of committed fraud involving computers is relatively new and ground-breaking stuff within the legal arena.

Works Cited

BBC News. (2010, 1 8). Giant fraud insider trading case director pleads guilty . Retrieved 7 20, 2010, from BBC News: http://news.bbc.co.uk/2/hi/business/8447348.stm

Fighting Fraud. (2009, 4 8). A smart computer to detect insider trading. Retrieved 7 20, 2010, from Fighting Fraud: http://fightingfraud.blogspot.com/2009/04/smart-computer-to-detect-insider.html

Neumeister, L. (2010, 1 7). Anil Kumar. Retrieved 7 20, 2010, from Huffington Post: http://www.huffingtonpost.com/2010/01/07/anil-kumars-guilty-galleo_n_415244.html

Ramen, R. (2010). Cyber Crimes Changing Consumer Behavior in America . Retrieved 7 20, 2010, from Business Exchange: http://bx.businessweek.com/information-security/cyber-crimes-changing-consumer-behavior-in-america/1689117133210196386-b904c430d5f19ed3c77667bb5d28051d/