Born during the Depression, my early mentor in securities litigation once lamented, “I hate good times; good times hide fraud.” Accordingly, at the beginning of the 1990s tech boom, we hired a team of analysts to ferret out hidden earnings manipulation and other shenanigans well before the market turned and the emperor’s lack of clothes displayed. The experiment failed, and the analysts were let go.

Since then the “good times hide fraud” maxim has held true. The past few years have been bull markets for stocks. While we have analyzed over 90 cases over the past six months, and an untold number of unexpected stock drops, only rarely have we believed that the situations raised strong suspicions of fraud. Those situations that did raise strong suspicions often involve penny stocks with little damage to our clients.

Statistics bear out our observations. Since 2006, restatements—a common revelation of fraud—have dropped from 1,771 to 768 in 2012. That’s over 50 percent. The number of issues requiring those restatements declined by almost a third, with most issues relating to debt and equity, tax and cash flow errors. Moreover, the percentage of restatements that impact the reliance on past year financials dropped almost 50 percent.

These trends have impacted the filing of securitiesrelated lawsuits. The number of SEC investigations has declined to the lowest level since 2007. And even then, the investigations tend to focus on insider trading, offering fraud, Ponzi schemes and market crisis cases. Securities fraud class actions, according to Cornerstone Research, remained at “depressed levels” during the first half of 2013. Filings are on track to be down almost 25 percent. Of those filings, the number related to stocks traded over-the-counter (with smaller market capitalizations) has doubled to 8 percent. The total dollar losses associated with the filings also decreased to less than half of the semiannual average from 1997-2012.

Does all this mean that securities fraud cases are slowly disappearing? We think not. The year with the lowest number of class action filings was 2006, and the year with the lowest number of SEC investigations was 2007. Those were boom years immediately before the credit crisis. We believe investors are currently in the calm before the next storm. Much is happening, behind the scenes, which will be undetected until the current boom wanes. Apparently the new SEC Chairwoman, Mary Jo Wright, thinks so too.

On July 2 the SEC announced the creation of the new Financial Reporting and Audit Task Force and the new Center for Risk and Quantitative Analysis. These offices will be using a new tool called the Accounting Quality Management Model (AQM). The AQM has been given the nickname “RoboCop” by the financial industry, after the police cyborg in the 1997 science-fiction thriller of the same name.

RoboCop is like the poor team of analysts we let go in the 1990s, only in “the cloud” and on steroids. It’s a computer program that mines XBLR data tags in all SEC filings combined with correlation of text and other data the SEC will not disclose. When fully operational, the SEC’s algorithm, running on super-fast computers, will search through all daily filings and ferret out potential fraud in less than 24 hours, without human intervention.

The SEC’s architect of RoboCop, Craig Lewis, has explained that not only will RoboCop be looking at specific financial data, but it will be looking at comparisons to peer groups and the usage of language in Management’s Discussion and Analysis, which the SEC has found to be associated with earnings management. RoboCop will provide the SEC investigators with a risk score which will then be compared to tips, complaints and referrals.

Perhaps with RoboCop the SEC will break the “good times hide fraud” maxim. Or, better yet, as in the 2002 Tom Cruise film “Minority Report,” the SEC will be able to foretell fraud, and apprehend fraudsters before they even know they are about to commit fraud.

Until then, we are ready for the next bear market and we will do everything humanly possible to detect fraud… humanly possible to detect fraud…humanly possible to detect fraud....