In-House Spy Software Becomes Big Business

LONDON/BOSTON (Reuters) - If you work for a bank, a computer may be reading your e-mail, listening to your phone calls or analyzing chat conversations as you type.

Even banking workers used to the idea of surveillance might balk at the thought of a computer doing the job.

But there are strong prospects for the software niche, as banks try to keep a much closer eye on staff in the wake of scandals such as Jerome Kerviel's rogue trading at Societe Generale, or the aggressive rumor-mill that undermined banks including HBOS and Bear Stearns.

"With the credit crisis and so on, people started to be much more careful," said Ruggero Contu, principal research analyst at information technology consultants Gartner.

Big Business

Known collectively as e-discovery, these technologies are booming despite a slowdown in other areas. Gartner forecasts the segment will generate $760.5 million in revenues this year, up from $524.5 million in 2007.

The systems to record and monitor employee activity can help companies collect huge amounts of internal information -- which they may increasingly need in the face of lawsuits spawned by the subprime crisis, or to meet rising regulatory demands.

U.S. politicians are demanding tougher rules in the wake of the collapse of the once red-hot housing market, while the 2002 Sarbanes-Oxley Act on corporate accounting and investor protection has already spawned hefty legal requirements.

"The overall tech base is under pressure on the back of the credit crunch but there are a few niches, for example the e-discovery space, which may benefit from the regulation," said Josep Bori, technology sector analyst at Deutsche Bank.

Banks are cutting non-essential spending and laying off staff to make up for losses and a slump in business. But spending on e-discovery bucks the trend.

"The one and only area where delays or cancellations are not happening is the regulatory and compliance. There's no way to avoid compliance," said Stephane Gregoire, a product management director at Brussels-headquartered FRSGlobal, which supplies regulatory reporting tools to top banks.

Walls Have Eyes

An obvious potential winner identified by Deutsche among others is Anglo-American Autonomy Corp Plc, founded by Cambridge University researcher Mike Lynch. He said it was an Autonomy system that detected that mails created by Kerviel to support what he was saying had not been sent.

The company, with forecast revenue of more than $480 million this year according to analysts polled by Reuters Estimates, sells search technology that can understand e-mail, text, voice and video data. The stock has outperformed the FTSE index by more than 50 percent over the past year.

"The effect of the subprime crisis appears now to be a positive for our business," said Lynch. "This is all being driven by trading scandals and by the sharpening of requests from regulators."

Many companies maintain the right to monitor an employee's electronic correspondence using company property: in Britain, for instance, this is allowed if staff are informed and "the benefits outweigh the risks to individuals' privacy," according to the British Information Commissioner's Office.

The problems the software can help resolve can be costly.

Kerviel was blamed for a 4.9 billion euros ($7.7 billion) loss at Societe Generale. In March over 3 billion pounds ($6 billion) was wiped off the value of British bank HBOS in less than an hour after some traders spread false rumors it had problems. Bear Stearns ended up being taken over.

Credit Suisse blamed a handful of traders for a multi-billion dollar loss, saying they had deliberately mispriced complex credit products.

Such mishaps, including wrong-footed bets on high-risk home loans, have put internal security and data management high on banks' agendas.

"Subprime brought that to a head," said David Paris from the financial markets consulting unit of IBM. "Rather than saying 'strategically we need to go in that direction but don't want to invest now', (companies say) 'oh gosh, we need to do that'."

Message Monitors

Kailash Ambwani, CEO of FaceTime Communications, a privately held U.S. company whose software helps companies monitor instant messaging traffic and whose customers include many major banks, said SocGen had boosted interest in FaceTime's technology.

In February, he was recalled to New York from a ski holiday in Lake Tahoe to pitch to executives of two top banks which weren't yet customers: "We had been talking to them, and what this event did was to cause an acceleration in the process."

Another U.S.-based instant messaging specialist also reports fresh interest. Akonix technology archives and monitors instant messaging conversations in real time, sending alerts on certain key words or names or number combinations.

The company says it has in the past six months gained two new clients, which are among the top three or five U.S. brokerages.

"It's not new regulations that have caused an up-pick in interest, it really is incidents like Societe Generale ... where communications were used to do illegal activities," Akonix's head of marketing Don Montgomery said.

And the industry is also attracting some employees who have first-hand knowledge of how to beat the system. French software company LCA said in April it had hired none less than the former SocGen trader Kerviel.