Reflections on “good” and “bad”: insider trading and ethical dilemmas

One of these days I was trying to sort out my archives and stumbled upon notes of 2009 about Galleon (the huge insider trading scandal). I never actually got to assembling them into an article, yet I think that this subject warrants attention. This is even more so in the context of psychological issues involved. Thus, in this post let me address both.

To begin with, imagine, New York City, 2009. The headlines of business papers shout: “Billionaire hedge fund founder Raj Rajaratnam and executives from some of the most prestigious U.S. companies were charged on Friday with the largest hedge fund insider-trading scheme ever.” Aside from Rajarantam three other executives involved – from IBM, McKinsey & Co and the venture capital arm of Intel Corp – were also facing criminal charges. As the U.S. Attorney Mr. Preet Bharara commented back then: “This is not a garden-variety insider trading case“. But of course it wasn’t! We are talking about the scheme that made more than $20 million in illegal profits! However, the main question I personally had, when reading newspapers, was: why did they do that?

Consider for instance, Rajaratnam. He was one of the richest Sri Lankans in the world; he was featured by Forbes magazine in 2009 among the world’s wealthiest billionaires, with a net worth of $1.3 billion. Consider Anil Kumar, a director of the notorious McKinsey & Co. consultancy (also involved in the scandal). A director at McKinsey gets a very hefty salary. Clean salary. Those people had prestige. Those people had money. Those people “ruled” the world, for crying out loud! Why did they need to risk all that? Maybe because they believed that they indeed ruled the world?

Illegal insider trading is a crime; however there is also a great deal of ethical considerations involved. When we are talking about, say, murder, it is somewhat easier to draw the line. There are still a whole bunch of possible arguments (mainly related to self-defense and protection of your beloved ones); yet it is still easier to define your attitude or ethical standards with respect to that. This is not the case in connection with insider trading.

You disagree? You say that a crime is a crime and you would personally never do anything criminal yourself and definitely not for money? You say that those ultra-rich bastards were overly greedy and should be punished? Fair enough. Now, consider the following situation:

Imagine that your friend tells YOU: “Our Corporation you have shares in, tomorrow will fail for bankruptcy”. What would you do? Yes, you know that the friend of yours could not have told you this, because he is under the duty of not disclosing this type of information. But he did disclose. He is your friend after all and he knows about the student loan you have to repay, about the mortgage, about debts. So, he told you. Will you not run to sell your shares, because you know that this information came to you, so-to-say, illegally? You say it’s different? Well, guess what: legally, it is not, legally you would both commit a crime.

I will give you yet another question for reflection: and what if you would lose a lot of money because of such bankruptcy and afterwards found out that that friend of yours knew about it, but didn’t tell you? How will that impact your relationship with him? Yes, let me put it that extreme:

committing an economic crime, which you might never be charged with, which will save you a lot of financial trouble and frankly, won’t even harm anyone

versus

losing your money and probably losing a friend on top of that.

What you will do is your call, as this (legal considerations aside) is an ethical dilemma.

You face ethical dilemmas on a smaller scale almost daily, yet it is only when exaggerated, that you realize how morally difficult the decision might get. It depends on what’s at stake of course, still it boils down to the clash of your values. The question is how do you deal with ethical dilemmas yourself and how do you teach your kids to deal with them?

As I studied law and then did an MBA I always had an in-depth course on ethics. We have repeatedly discussed in class all the classic ethical dilemmas: from the questions of killing one to save thousands to revealing certain information you don’t legally have to, but if you do that would have a huge impact. Lots of thought-provoking questions. Sometimes, based on who are you discussing a particular ethical dilemma with, you might have a pretty heated discussion on the subject. However, there is never a universally good conclusion.

How do you deal with ethical dilemmas? To begin with, in order to be able to deal with them in case you face a really serious one; it might be a good idea to reflect on some of those difficult questions from time to time. That also helps you identifying your true values. Though, speaking about dealing with an ethical dilemma I have devised some steps for myself.

At the outset, it’s important to set the facts straight to see if you actually face an ethical dilemma. It could very well be that you don’t have to choose, or that there is a third way which didn’t occur to you at first. It is also possible that you can do something else that would result in not having to choose.

But let’s assume it is indeed an either or question. In this case:

  1. Identify what would happen if you go for each of the options.
  2. Identify what would not happen if you go for each of the options.
  3. For each of the options ask yourself: can I live with that decision? Can I look into the eyes of my mother or my partner, or my kids knowing that they know what I have chosen?
  4. For each of the options ask yourself: will I regret not doing it?

The good news is that if you have answered the above questions, you will be able to make a more conscious decision.

The bad news is that you will still have to make that decision (and it still doesn’t mean your decision is legal).

This approach is what I apply myself and what I would also like my kids to master.

To conclude, in this world where things are rarely black and white we need to master a “methodology” of dealing with ethical dilemmas and other difficult decisions, however we cannot forget that it’s only the solid value foundation that allows us in the end to make those decisions. Therefore, in plain English – I would strongly advocate thinking about different ethically complex issues yourself and also discussing them with your kids. Those reflections and discussions help you form a truly founded personal opinion which will be based not on some external influences, but on the strong internal values.

 

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2 thoughts on “Reflections on “good” and “bad”: insider trading and ethical dilemmas”

  1. Ethical issues that become easily politicized seems to engender a lot of hate in this country now in black and white terms. I see the choice as often having to choose between two extremes of election rhetoric. There must be a better way to avoid this predicament.

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    1. I assume you are talking about the US now? In this connection, as I am in Europe, I have but a vague impression highly influenced by media… Politics in general is a whole other story, sadly, and I am afraid to conclude that ethics tend not to prevail in making political decisions.

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