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The securities industry boasts a stressful working environment that puts an emphasis on profit alone sometimes causing it’s workers to resort to unethical methods of trade. The result is a mistrust between the common investor and the brokerage houses they use to process their trades. This cheating in order to gain an advantage over the market is best focused on with the insider trading scandals of the past and their repercussions on how business ethics should be practiced in the workplace today.
The 1980’s was a revolutionary period for stock trading. New computer systems transformed the industry making the exchange faster to transact and easier to monitor. This gave way to the exposure of insider trading and traders had to decide for themselves whether they would succumb to the fast money or stick with standard methods. This division was based upon the individuals business ethics which, in time, would become more defined with the downfall of notorious criminals like investment banker Dennis Levine (Frantz 44). Oliver Stone’s movie Wall Street analyzes this conflict between right and wrong and gives the average person a more in depth view of how a trader can use inside information to boast more profit.
The Securities and Exchange Commission (SEC) defines insiders as “any shareholder who holds in excess of five percent of a companies voting stock or any officer or director of a corporation or employee who has access to important corporate information” (McGee 219). This information can consist of future mergers, takeovers, pending lawsuits, etc. usually vital to the companies future stock value. On the basis of this information the insider puts in an order to buy or sell a block of stock. This alerts
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other traders to follow and once the information is made public the change is apparent. This kind of activity is perfectly legal and can actually benefit the market as a whole (McAdams 357). However, when an individual misappropriates information and uses it for their own personal gain it is illegal insider trading (McGee 220). This kind of transaction is what tempts lowly traders in the workplace and is sometimes used as a quick solution to covering debt.
Entry level employees in large brokerage firms work long hours and must withstand a great deal of pressure to succeed. Those who choose the right stocks and get the right clients advance, while the others wait their turn. Oliver Stone captures this atmosphere in his movie Wall Street, the story of a young stockbroker, Bud Fox, who is allured by money and power to join Gordon Gekko, a dirty inside trader. When the movie begins Bud is a lowly broker stuck in an entry level position. His workplace is a frantic mess of cubicles and computers filled with other employees all with the same dream of earning the most money for the firm. Bud finds himself losing money and close to failure when he is given an opportunity to exploit his inside information on an airline for the profit of Gekko. He is then taken under Gekko’s wing and starts to steal files from legal offices to gain information on companies.(Stone)
Bud’s story is much like the rest of the inside traders. He is from a middle-class family and the power of money seduces him into taking shortcuts. ). “Give me guys that are poor, smart, hungry, and no feelings.” is what Gekko looks for and uses (Stone). Dennis Levine started out much the same and worked himself up through illicit trades to become one of the biggest “crooks” on Wall Street (Widder 5). Levine and Bud’s similar
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rationalization for his insider trading was that “everyone was doing it” (Widder 5). Both men also eventually get caught and go to jail. However, since coming out of jail Levine has reformed his ways and turned to writing and lecturing on business ethics using his own story to persuade others not to stray from what is right (Paltrow 4). His reform has set an example for others to follow.
Since quick money appeals to most everyone Wall Street firms have had to create countermeasures to deter employees from making bad decisions. The securities industry has spent a great deal of time winning back the common investors that left after the crash of 1987 and wants to make sure they will not lose faith again. Therefore, firms have placed an increased emphasis on teaching their employees business ethics and backed this up with increased monitoring on trades.
The company, for example, maintains two separate lists involving companies or transactions that could be used by insiders for possible illicit gain. One is a “watch list” of very sensitive transactions involving Nikko[securities firm], such as potential mergers or acquisitions. The other is a “restricted list” of companies that employees will refrain from personally trading or commenting on. Meantime, frequent seminars are held with employees regarding trading issues, including what does or does not constitute insider trading (Halverson 9).
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These practices have help to clarify recent rule changes by the SEC and create a more legally proficient staff. The result is a more ethically motivated industry and recent booms in the market reflect how an honest exchange should work.
Even though Wall Street firms have tightened their grip on employees the outside world can still find loopholes in the system and exploit them. In New York City a psychiatrist named Robert Willis had a patient whose husband had a business relationship with Sanford Weill, the former chief executive of Shearson Loeb Rhodes. The woman disclosed that Weil was considering becoming chief executive of Bank America and if he did would invest one billion in the company. The psychiatrist then invested $171,130 in Bank America common stock and, when the news became public, produced a profit of $27,475 (Paltrow 4). Since the information was obtained under a doctor-patient relationship it was illegal to use and therefore Willis was prosecuted.
The two landmark cases of Chiarella vs. the Supreme Court and Dirks vs. the Supreme Court represent two exceptions to the use of inside information.
“In Chiarella the Supreme Court held that one who fails to disclose material information prior to the consummation of a transaction commits fraud only when he is under a duty to do so” (McGee 222). Chiarella worked at a printing company sometimes responsible for copying confidential documents. Eventually, he figured out which companies were subject for takeovers and invested in them. The Supreme Court held that he was not guilty because he did not commit fraud against the party who sold him the stock (McGee 222). In Dirks, a securities analyst, employees from a company came and informed him about massive fraud existing in their company. Dirks told his clients to sell the stock and was
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accused for use of inside information. He was found innocent because the employees were not interested in their own gain but concerned about exposing the fraud (McGee 222). Both of these cases created instances in which inside information could benefit a company and increase security measures that could prevent information leaks. The decisions of these cases actually benefited the securities industry because companies learned from their mistakes and subsequently took measures to make sure they didn’t happen again.
Insider trading is accessible from corporate leaders to photocopy clerks and the possibility of monitoring all illegal transactions is impossible. However, if the individual worker can create his or her own ethical code and live by it every day then temptation can be avoided. “Three out of four respondents to a survey of American corporations indicated the use of an employee code of conduct” (McAdams 61) If this trend were to continue then most workplaces would become ethically motivated and the prospect of cheating would be unappealing. These importance values should be stressed in higher levels of education so the newcomers in the workforce are no stranger to the change (McAdams 400).
People generally learn from their mistakes and in the case of once powerful Dennis Levine can even use their experience to teach others. Cheating, in any form, is wrong and the worker who thinks they are invincible to the law is working on hourglass time. The workplace should be free of the influence of insider trading and if the country remains on the same track, it will be. In this revolutionary age of the Internet the capability to exploit information will still pose a threat to the SEC but the number of cheaters will hopefully decline.