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DA4. Insider Trading and Fiduciary Duty

Statement

Please read the case study entitled “Insider Trading and Fiduciary Duty” from chapter 7 of the Business Ethics textbook that you find in the reading assignment.

Based on what you have learned in this unit, answer the following questions:

  • Employers in financial services must have stringent codes of professional behavior for their employees to observe. Even given such a code, how should employees honor their fiduciary duty to safeguard the firm’s assets and treat clients equitably? What mechanisms would you suggest for keeping employees in banking, equities trading, and financial advising within the limits of the law and ethical behavior?
  • This case dominated the headlines in the 1980s and the accused in this case were all severely fined and received prison sentences. How do you think this case might be treated today?
  • Should employees in these industries be encouraged or even required to receive ethical certification from the state or from professional associations? Why or why not?

Answer

The case study mentioned in (Bayer, 2023, p. 213) involves three executives at Drexel Burnham Lambert (DBL), a major investment bank, who were accused of insider trading. The executives were accused of using insider information to trade in the stock of companies that DBL was advising. One of the executives paid 1.1 billion dollars in fines and was sentenced to 10 years, and another paid 100 million and permanently banned from the securities industry. The executives violated their financial duties to their employer and the company’s clients. These actions did not affect the employees alone, but they also affected the company and its clients; DBL ended up in bankruptcy in 1990; while several clients -who suffered losses due to these actions- filed lawsuits against the company asking for compensation.

Employees should honor their fiduciary duty to safeguard the firm’s assets and treat clients equitably, to ensure this, educational institutions that offer courses in these domains should give special attention to the matter of ethics and make it mandatory, and crucial in academic achievement (E.g. if you fail ethics, you fail the entire year). More standards and observability in the financial industry; that is, if all companies in the industry do their services in the standard way, it is easier to detect animalities as they occur. More transparency and outsider auditing. This does not mean government intervention, but rather, regulators should force companies to higher other third-party inspectors, and the type of inspection should contribute to the company’s reputation.

This case dominated the headlines in the 1980s and the accused in this case were all severely fined and received prison sentences, but I don’t think it will receive the same attention today; As people’s attention is now more dispersed with the rise of social media as opposed to the mainstream media which was the only source of information in the 1980s. The SEC’s ability to detect such cases has improved, and the regulations that were put in place after the case has made it harder for such cases to occur. On the other hand, with technology advancements, there may be new undiscovered cases that may take headlines once discovered.

Employees in these industries to be encouraged or even required to receive ethical certification from the state or from a professional association is a good idea, but it is not enough; as certification can be violated at any time, however, it may be necessary to prove that you have received the necessary knowledge about the industry ethics and regulations. An auto-expiring certification that needs to be renewed every certain period may be a better idea, with an exam and review of the applicant’s file and performance in their career.

In all cases, employees have a duty of loyalty and if they act adversely to the employer, they breach their fiduciary duty (Smith, 2014). The financial industry is sensitive as it deals with people’s money and involves the disclosure of private financial information; the employees need to act morally and ethically and consider that their actions may affect lots of people; on the other hand, ensuring good salaries and benefits to employees may reduce the tendency to act unethically.

References

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