Insider Trading

Discuss about the Business Events Involving Ethical Issues.

Ethics revolves around the moral principles applied to personal behaviour and businesses in a business environment. In most cases, an ethical company would comply with the appropriate regulations and laws and operate honestly. Such a company competes fairly and offers a flexible environment for the stakeholders like employees, thus balances the interest of all stakeholders (Beauchamp, Bowie, & Arnold 2009). Although ethical behaviours may appear to be normal course, unfortunately, some businesses and business people fail to operate ethically. Recently, many companies including Tyco, Enron, Lehman Brothers, HealthSouth, and WorldCom, have captured the attention and hit news headlines because of unethical behaviour leading to corporate scandals and the unfortunate collapse of the companies (Giles 2015). The criminal actions evident from these practices include bribery and corruption, fraud, collusion, tax evasion, and insider dealings (Elkington 1998). Given the significance of the criminal actions, the article identifies publicly available events involving ethical issues and compares and contrasts the importance of the moral boundaries.

The criminal act of the directors, executives, managers, and employees to great organizations brought down the firms. Although some of the companies continue to operate, they have suffered the worst reputation backlash and their results damaged due to loss-making transactions, the payment of compensations, and regulatory fines. The internal fraud scandals damaged Olympus, USB, Allied Irish Banks completely thus bringing to question why everyone in business organization commits financial crime (Giles 2015).

Insider dealing is one of the criminal behaviour involving individuals who can access unpublished price-sensitive information. These people would act on this knowledge by purchasing and selling shares illegally to enrich themselves (Shaw, Barry, Issa, & Cately 2013). The motive of the scheme is undoubtedly greed and arrogance of the player to seem to be intelligent and influential. With the insider dealing, the conflict of interest is also evident because the player wants to use the sensitive information for personal advantage at the expense of the organization. Technically, insider trading happens when the company broker or senior officer attempts to trade in the firm’s listed security due to an inside information regarding the listed security (Giles 2015). Just like bribery and corruption, money laundering, fraud, and tax evasion is considered to be a manipulation and abuse of market. The behaviour appears treated seriously in regulations and laws in many countries. For example, in the European Union, the Markets Abuse Directive is part of the rules applicable in all jurisdictions (Beauchamp et al. 2009). The regulation promotes efficient and clean markets in the region thus allows for timely disclosure of all the sensitive information to the market. The overarching principles that guide the market disclosures include accuracy, transparency, integrity, and consistency.

Fraud

The law dealing with the criminal behaviour differ from jurisdiction to jurisdiction. For instance, in the United Kingdom, the insider trading is an offence that attracts a maximum prison sentence or an unlimited fine (Shaw et al. 2013). Despite the existence of the Insider Dealing Act in the United Kingdom, the authorities failed to raise the insider trading cases until 2008. In the next six years, the country secured about 24 convictions due to the insider dealings thus confirming the UK’s resolve to act on the market manipulation and abuse that led to the global financial crisis (Giles 2015). Like in the UK, the US government took a healthy attitude towards the inside dealings as evident in the Galleon hedge fund case. The case represented a robust crackdown on the Wall Street’s involvement in insider trading. According to Elkington (1998), the investigation into scandal saw the Hedge Fund founder, Raj Rajaratnam; get charged together with his associates, traders, analysts, and company insiders. From charges, it was evident that the founder accessed secret information that ensured he to made significant profits. The hedge fund founder was convicted to eleven years imprisonment.

In the United States, the Securities Act of 1933 was adopted by the Congress as part of the Securities Exchange Act that gave the SEC the authority to monitor the activities in the securities industry.  Through the Insider Trading Sanction Act, the SEC enforces the insider dealing laws. In Sarbanes-Oxley Act of 2002 was established following the amended to the SEC Act of 1934 that introduced a fine of up $5 million on individuals who violated the act. The aforementioned case of Raj Rajaratnam and Galleon Group followed the violation of the Act because Raj Rajaratnam conspired to trade using the insider information. According to the America government, the scheme was to ensure that Rajaratnam earned $20 million in profit. The jury found the Galleon Group founder guilty on fourteen counts of securities frauds and conspiracy changes, thus getting convicted (Koba 2011).

It is an intentional act of an individual or people with the authority to govern, or third parties engaging in the use of the deceptive actions as defined by the International Auditing Standard (Gschwandtner n.d; Giles 2015). Fraud is conducted against companies by external parties or managers through the collusive scheme that involves the insider working with an outsider. The actions of the senior managers, directors, and owners are the biggest risk to any company regarding the reputational damage and losses. Unlike the insider dealing, the fraudsters are the first-time offenders who try to take advantage of the available opportunity to commit fraud (Elkington 1998). Nonetheless, it remains to be a crime, and the offender is vulnerable to conviction. Undeniably, the recent economic condition experienced across the world followed the fraud risk that seems to have increased in both private and public sectors. For instance, in the United Kingdom, the public sector has experienced minimal pay rises and redundancies thus increased the motivation to engage in fraud.

Bribery or Corruption

Ponzi scheme exposed the biggest fraud case in which the investment manager, Bernard Madoff’s defrauded his hedge fund over $50 billion thus liquidating the holdings and put pressure on the stock prices (Lenzner 2008). In 2009, Bernie Madoff pleaded guilty of swindling investors’ money worth $65 billion. Madoff stole from the investors by setting up a portfolio that looked like it could match the S&P 500 returns. Madoff had violated the SEC regulations on how to handle the investors’ money. The seventy-year-old man was convicted and sentenced to 150 years because of unclear business models and riding on the ignorance of the targeted investors. The conviction confirmed that fraud was a serious criminal offence that the U.S and SEC never condoned. He opted to engage in perjury, false statements, wire fraud, and false filing with the Securities Exchange Commission. The ethical issues surrounding Madoff’s actions were disclosure and transparency because he engaged in opaque and secretive activities (Donaldson 2008).

A Bribe is favour or money promised or given to an individual to influence the conduct or judgment of a person in the management or position of trust. It is something that induces or influences the outcome. Like in the previous cases, bribery or soliciting, offering, accepting, or giving bribe is a crime even if the offer is refused. Corruption takes different forms. For example, in many pharmaceutical companies, the attempt to persuade doctors or physicians to prescribe an individual product is typical (Gini & Marcoux 2009). In most cases, tend to influence doctors by buying them meals and other trinkets or sponsor them to medical conventions. International Business Ethics Institute reported that business gifts had been categorized as bribes offered to an individual to influence the decisions such as a contract.

GlaxoSmithKline PLC has opted to pay the SEC about $20 million to settle thje case where it got involved in bribery allegations. The SEC alleged that GlaxoSmithKline bribed a Chinese subsidiary pharmaceutical so that it could increase product sales. The Chinese subsidiary and joint venture offered the officials of GlaxoSmithKline gifts, shopping excursions and travel. The GSK never maintained sufficient internal accounting controls as expected by the law. It failed to adhere to the anti-corruption compliance program leading to improper conduct as explained by the SEC (SEC, 2016). 

Tax avoidance is an illegal practice where a person or organization opts to provide inaccurate data as a tax return. Such activities are criminal behaviours that have landed companies or people to jails. For example, the celebrities including Wesley Snipes, and Darry Strawberry fell from grace in the public glare as they were compelled to learn the lesson the hard way because they engaged or condoned the unethical practices like tax evasion. The illegal behaviour landed some of the celebrities in prison (Fontenez 2008).

Morris Zuckerman, an oil-industry investor faces seven years imprisonment for evading tax worth $40 million (Drucker & Greifeld 2016). Zuckerman pleaded guilty to the federal charges labelled against him by falsely claiming deductions worth millions. The 72-year-old investor provide false information for the Internal Revenue Service audits, but later admitted that he failed to report $28 million, and even backdated documents in supporting his claims. The actions of Zuckerman violated the ethical practices as defined by the IRS.

Conclusion

Anybody who rationalizes decision by asserting that everyone engages in the practice should reconsider the action because unethical behaviour reflects an individual’s personal brand. In the modern business environment, companies in both private and public sectors have suffered from unethical practices such as bribery, insider trading, fraud, and tax evasion. The article has highlighted these unethical practices and how they have affected the perpetrators. Based on the discussions, all the unethical practices attract criminal charges because they cause harm to the society.

Beauchamp, TL, Bowie, NE & Arnold, DG. 2009, Ethical Theory and Business, 8^th Ed, Prentice Hall, Upper Saddle River, New Jersey.

Donaldson, T, 2008. “Hedge Fund Ethics”, Business Ethics Quarterly, vol. 18, Iss. 3, pp. 405-416.

Drucker, J & Greifeld, K. 2016, Jun 28, “Oil Investor Zukerman Pleads Guilty in Tax Evasion Case”, Bloomberg, Available at https://www.bloomberg.com/news/articles/2016-06-27/oil-investor-zukerman-pleads-guilty-in-tax-evasion-case. [Accessed October 9, 2016].

Elkington, J. 1998, Cannibals with Forks: The Triple Bottom Line of 21st Century Business, New Society Publishers, Gabriola Island, Canada.

Fontenez, S. 2008, “Tax-Troubled Celebrities, Politicians, Outlaws”, CNN, Available at https://www.cnn.com/2008/LIVING/wayoflife/04/15/famous.tax/index.html. [Accessed October 9, 2015].

Giles, S. 2015, The Business Ethics Twin-Track: Combining Controls and Culture to Minimize Reputational Risk, Wiley, Chichester, West Sussex.

Gini, A & Marcoux, AM. 2009, Case Studies in Business Ethics, 6th Ed., Pearson Prentice Hall, Upper Saddle River, New Jersey.

Gschwandtner, G. n.d, “Lies and Deception in Selling: How to Tell When Customers or Prospects Are Lying to You,” Selling Power, vol. 15, no. 9, Available at https://www.sellingpower.com/content/article/?a=4256./lies-and-deception-in-selling. [Accessed October 9, 2015].

International Business Ethics Institute. n.d, Business Ethics, Available at https://business-ethics.org/. [Accessed October 9, 2015].

Koba, M. 2011, Aug 18, “Insider Trading: CNBC Explains”, CNBC, Available at https://www.cnbc.com/id/43583339. [Accessed October 9, 2016].

Lenzner, R. 200, Dec 12, “Bernie Madoff’s $50 billion Ponzi scheme”, Forbes, Available at https://www.forbes.com/2008/12/12/madoff-ponzi-hedge-pf-ii-in_rl_1212croesus_inl.html. [Accessed October 9, 2016].

SEC. 2016, Sep 30, “US before the Securities and Exchange Commission”, GSK Plc, Available at https://www.ethic-intelligence.com/wp-content/uploads/2016-SEC-GSK-settles.pdf. [Accessed October 9, 2016]. 

Shaw, WH, Barry, V, Issa, T, & Cately, B. 2013, Moral Issues in Business, 2^nd Asia Pacific Ed., Cengage Learning, Australia.