Ethics Case Study

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Source materials:

  • Parloff, R. (2009, October). Bear Stearns case: Not so simple. FORTUNE Magazine.
  • Gandel, S. (2009). The Bear Stearns Verdict: A Blow to E-Mail Prosecutions. TIME.
  • Urda, A. (2006, September). Government Drops Case Against Bear Stearns Trader. Law360.
  • Anderson, J. (2005, April 13). 15 Specialists from Big Board Are Indicted. New York Times.
  • Campanile, C. (2005, April 13). Biggest $cam on the Big Board – 15 NYSE Floor Trader Busted. New York Post.
  • United States of America before the SEC, File No. 3-11893. Retrieved from https://books.google.com/books?id=Xy2zpCKFRQcC&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false

Does the Government’s Inability to Convict Technological Wrongdoing in Finance Make such Actions Ethically Sound?

Case 1:

In September 2006, federal prosecutors dropped charges against Kevin Fee, a former specialist at Bear Wagner Specialists LLC who was the last of his group to be acquitted of charges that they were part of an illegal Wall Street trading scheme. A year earlier, Fee and 14 other New York Stock Exchange floor traders were indicted in federal court on the charge that they engaged in two illegal trading schemes from 1999 to 2003; by using knowledge of an upcoming buy order to deal in front of it, and “interpositioning”, where these specialists intervened in a trade rather than simply matching buy and sell orders. They gained an estimated $13.5 million in illegal profits for themselves and their firms from these schemes, and investors lost $19 million in total.

In brief, each listed company on the NYSE was assigned to a specialist, and every order to trade a specialist’s stock went to him or her. They acted as agents who bought and sold shares for their customers, and were supposed to match up offers to sell with offers to buy in the same price range. If there was no match between buy and sell orders, they could trade the proprietary account of his own firm to fill the void. However, they were prohibited from engaging in a proprietary trade when he had “knowledge of any particular unexecuted customer’s order [that] could be executed at the same price”.

Testimony from experts in financial analytics and psychology held that exceptions in computerized data where timestamps that were logged in the wrong order between trades were the product of errors, rather than deliberate wrongdoing. Both expert witnesses cited that this electronic data was simply not reliable enough to provide conclusive proof of wrongdoing. In their estimation, the increased complexity of NYSE trading becoming more intense and complex in the early 2000s lead to human error becoming more plausible. The psychologist lent credence to a clerk’s defense that he could not keep up with his specialist’s fast pace in trading, and therefore made many errors when interacting with the computerized Super Designated Order Turnaround System (referred to as “DOT”).

Case 2:

On November 10, 2009, a jury found that Michael Tannin and Ralph Cioffi, both Bear Stearns hedge fund managers, were not guilty of securities fraud. Federal prosecutors charged Tannin and Cioffi of lying to investors, as Tannin had emailed Cioffi voicing his concerns with the health of two of Bear Stearns’s most lucrative funds while publicly still insisting to investors that their fund would perform well. In June 2007, these hedge funds collapsed, presaging the subprime mortgage crisis. In their belief that already declining mortgage markets would eventually stabilize, Cioffi and Tannin were alleged to have lied about how much of their own funds they had sunk into these hedge funds, even though their private email exchange suggested the opposite.

Jurors ultimately decided that emails alone were not enough to convict Cioffi and Tannin, determining that they ultimately provided an incomplete picture of whether deliberate and systematic wrongdoing went on.

Ethical Framework:

In both of these cases, electronic evidence was ultimately deemed insufficient in determining guilt. The government’s inability to successfully prosecute this white-collar wrongdoing does not suggest that the Bear Stearns hedge fund managers or the NYSE specialists acted ethically. Not ending up in prison is not a good barometer of ethical decision-making!

Yet, these two cases reveal the fallibility of electronic evidence, in an age when our business and workplace exchanges are almost exclusively being conducted electronically and when the “paper trail” becomes something very different than it once did. It throws up all sorts of interesting questions about our enduring responsibility to adhere to ethical decision-making frameworks even when it is easier and easier to get away with wrongdoing.

Additionally, questions about the ethical conduct of the prosecutors also arise. Especially in the wake of the Great Recession and a growing public desire to see Wall Street taken to task, did prosecutors overreach in so aggressively pushing for convictions in both cases? Did they proceed with a case even though there was a good chance that their evidence would not stand up to greater scrutiny?

To guide our discussion of ethics in a technological age, here are my three frameworks of ethics:

  • Consequentialist: A utilitarian view of the world. Consider first which outcomes are most desirable for the greatest number of people. Concerned with ultimate results, rather than the process.
    • Questions to consider:
      1. What is the total amount of good that is produced as the result of this particular action of mine?
      2. Did the specialists and hedge fund managers produce net benefits for their clients even though they escaped prosecution?
  • Was there a greater public good to be achieved by the government lawyers pushing for convictions even when the evidence was not particularly strong?
  • Duty-bound ethics: An employee’s primary responsibility is to his community, group, clients. As part of being employed in a particular position, the employee has to follow certain rules of engagement that guide ethics – aka, “corporate culture”. Concerned with the process, rather than just ultimate results.
    • Questions to consider:
      1. Do these cases suggest the corrosion of corporate culture at Bear Stearns and the NYSE specialist firms?
      2. Were these white collar professionals derelict in their duty to their clients?
    • Virtuous ethics: The most abstract of the ethical frameworks, where actions are judged on the character traits that underpinned them.
      • Questions to consider:
        1. Does it feel as if these employees were acting in a way that most people would find distasteful?

Does it feel wrong that they “escaped” based on the incompletion of electronic evidence

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