From Volume 88, Number 6 (September 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 that 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 also 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?