“Even the most rational approach to ethics is defenseless if there isn’t the will to do what is right,” Alexander Solzhenitsyn said. This quote came to mind after reading about widening investigations into insider trading in the U.S. and U.K. governments.
- According to articles in the Wall Street Journal and New York Times, the FBI is currently building cases against 120 people for whom the agency has “substantial evidence” of insider trading, and there are another 120 people also under investigation. In addition, the SEC has “sprawling” investigations underway in several of its regional offices, according to a top official in the agency’s New York office. What is particularly disturbing is how widespread trading on inside information seems to have become.
- According to an article in the Financial Times, the increased prosecution of insider trading cases has made it more difficult for investment managers to talk to companies.
- Then there is the case of Noah Freeman, a Harvard-educated former hedge fund manager. After confessing to insider trading, he provided the government with the names of at least a dozen people who were also involved. Friedman gathered his information from an expert network, independent consultants and people at other hedge funds who shared information with him. At his trial last June, he testified that at his former employer trading on inside information “was regularly employed as part of our business model.”
- In the ultimate conflict of interest story, Goldman Sachs acted as the adviser to El Paso Corporation on its sale to Kinder Morgan, even though Goldman Sachs had a 19% stake in Kinder Morgan, as well as two seats on its board of directors. In addition, the Goldman banker who advised El Paso to accept Kinder Morgan’s bid, also owned $340,000 worth of Kinder Morgan stock. Of course, none of this was disclosed (nor the $20 million fee Goldman earned) when the deal was announced. Delaware's top business-court judge called the circumstances surrounding it “disturbing” and stated that the deal was “tainted by disloyalty.”
- It is important to remember that perceptions can be as damaging as reality. In January, I wrote about Phillipp Hildebrand’s perception problem, after it was learned that his wife had sold Swiss Francs and purchased dollars a few weeks before Switzerland’s central bank — headed by Hildebrand at the time — intervened to stop the appreciation of the Swiss Franc. According to an article in the Wall Street Journal, a recently concluded investigation into the affair found no evidence of any wrongdoing nor any breach of guidelines or regulations. Despite these findings, the reputations of Hildebrand and the Swiss National Bank were seriously damaged.
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