Sting Victims: Third-Party Harms in Undercover Police Operations
49 Pages Posted: 1 Mar 2015
Date Written: February 27, 2015
While undercover operations by the police are familiar, the harm they can impose on third parties is not. When government agents impersonate criminals, they can impose personal, physical, financial, and reputational harms on victims wholly unrelated to their criminal investigation. A sham drug deal can lead to gunfire and an injured bystander. The mere existence of a government-run fencing operation can lead to increased property theft.
In a number of recent financial fraud investigations, FBI agents have conducted stings which they knew could harm unwitting investors. These stings targeted fraudulent price manipulation of “penny stocks”: low-priced stocks marketed and sold directly to the public rather than through stock exchanges. Typically, an undercover FBI agent offers to help a suspect inflate the price of a penny stock by purchasing a large number of shares for manipulative purposes in exchange for a kickback. Not only does the tactic result in an arrest, it can harm innocent investors who purchase stock at a price that was misleadingly inflated — by the government itself.
How should the law address third-party harms attributable to such undercover operations? Surprisingly, this question receives little attention in scholarship or in legal doctrine. These third parties — sting victims — experience government-created harm that is little discussed, under-theorized, and lacks a meaningful regulatory framework. Both doctrinal and academic attention to undercover operations focus only on the bilateral relationship between the government and the target of the investigation. Relying on a variety of examples, but with a special emphasis on penny-stock fraud, we argue that the analysis of stings should recognize potential harms to third parties. Law-enforcement agencies should require consideration of these harms before conducting covert operations. We also identify ways in which stings may be structured and regulated to minimize these harms.
Keywords: police, undercover, penny stock, stings, financial fraud, white collar crime, entrapment, due process, FBI, criminal law, ABSCAM
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