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Stock Market Cases
22.Société Générale Rogue Trader (Chapter 5, pages 348–350)
What this case has to offer
Rogue traders, such as Jérôme Kerviel, can severely damage an organization, such as Société Générale
(SocGen), or even bankrupt a firm, as did Nick Leeson’s rogue trades that brought down Barings Bank. It
Teaching suggestions
The class can begin with a discussion of the key elements of corporate governance and accountability.
They can discuss
• how an organization could unintentionally install a negative organizational culture, and
Discussion of ethical issues
1. Did Jérôme Kerviel perpetrate a fraud? Why or why not?
Fraud is a legal concept. Essentially it means that an individual or organization intentionally
deceived another for personal gain. In this case, Kerviel did not personally gain from his
2. When such mammoth unauthorized trades occur, and the bank is bankrupted or severely damaged
financially, should the board of directors, who have the ultimate responsibility for the bank’s
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activities, or its executives whose job it is to protect the bank, go to jail rather than the rogue
trader?
The board of directors has the responsibility of overseeing management, and management has
the responsibility of ensuring that the organization operates in an efficient and effective manner
3. Where the bank’s actions in liquidating Kerviel’s positions ethical?
Unfairness in financial markets can occur when there is volatility, i.e., when there is a mismatch
between buyers and sellers. Although the market will eventually correct for any mismatch,
all of the market risks.
4. Did the French officials who authorized the liquidation behave ethically?
In the U.S., the Securities Exchange Act of 1934 authorizes the SEC to intervene in the
5. There is considerable debate about whether better controls can ever stop a rogue trader. What is
your opinion, and why?
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There is a trade-off to be considered for all internal prevention costs between their costs and
their benefits. It would be cost-prohibitive to install a control system that completely prevented
6. If enhanced controls really can’t stop all rogue traders, how are companies to be protected from
them?
Companies can protect themselves from rogue traders by installing the key elements of
7. Was the court’s verdict justified? Could it have been improved?
It seems like the court decided to impose a very harsh penalty on Mr. Kerviel, possibly to serve
as an example and deter other people from doing something similar. Nevertheless, it seems like
Useful Articles, Links, and Videos
Nicholson, Chris (November 17, 2010) “Kerviel: Bosses Never Said a Thing.” New York Times,
Business & Professional Ethics for Directors, Executives & Accountants, 8e
23. Galleon’s Insider Trading Network (Chapter 5, pages 350-352)
What this case has to offer
This case is the story of an apparently successful hedge fund manager who based his trading strategies
on inside information from tipsters and not on sound market research. Billionaire Raj Rajaratnam used a
vast network of contacts to profit from tips on nonpublic information from a number of companies such
Teaching suggestions
I start the discussion asking students how a trader, or hedge fund manager, can gather information to
develop a successful trading strategy. I then ask for an explanation of the concept of illegal insider
trading and discuss the apparent fine line between gathering information and obtaining confidential
Discussion of ethical issues
1. Should inside traders, who are non-violent, white collar criminals, be subject to Mafia-style
investigation tools?
Insider trading is a crime equivalent to theft. The U.S. Supreme Court explicitly adopted the
misappropriation theory of insider trading in the case United States v. O’Hagan (q.v.). The U.S.
SEC guidance (U.S. Securities and Exchange Commission 2011) on insider trading cites the
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Second, the Court acknowledged the “information as property” rationale underlying insider
trading prohibitions:
“A company’s confidential information…qualifies as property to which the company has a
2. How can a stock trader know when she or he is receiving inside information that would be illegal to
act upon?
It is not always easy to decide whether or not trading on certain information can be deemed
insider trading. The SEC guidance on insider trading (U.S. Securities and Exchange Commission
2011) explains that;
Furthermore, a fundamental component of illegal insider trading is being aware that certain
information is nonpublic:
“Rule 10b5-1 provides that a person trades on the basis of material nonpublic information if
a trader is “aware” of the material nonpublic information when making the purchase or sale.
As a way to avoid illegal insider trading, Rule 10b5 establishes that:
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The individual making the investment decision on behalf of the person to purchase or
sell the securities was not aware of the information; and
The person had implemented reasonable policies and procedures, taking into
consideration the nature of the person’s business, to ensure that individuals making
3. How can a stock trader avoid using insider information?
The answer to this question is related to the answer of the previous question. Using insider
information is directly linked to the means by which a trader obtains information. If direct
4. Would a private investor be subject to the same rules against using insider information as a stock
trader?
The same rules apply for private investors as for stock traders. In fact, the SEC has enforced
insider trading rules against:
• Corporate officers, directors, and employees who traded the corporation’s securities
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5. Should a person giving a tip (the tipper) be subject to the same penalties as the user (the tippee)?
The liability for insider trading violations cannot be avoided by passing on the information as
Useful Articles, Links, and Videos
United States v. O’Hagan, 521 U.S. 642 (1997); 117 S.Ct. 2199, 138 L.Ed.2d 724 , 65 USLW 4650, available
Business & Professional Ethics for Directors, Executives & Accountants, 8e
24. Conflicts of Interest on Wall Street (Chapter 5, pages 353–355)
What this case has to offer
This case illustrates some of the complex set of conflicts of interest that exist in the investment
community, and offers the opportunity to discuss some of the means available to manage them. It
Teaching suggestions
I start off by asking why Eliot Spitzer acted when the Sec and other agencies did not. This sets the stage
Discussion of ethical issues
1. Identify and explain the conflicts of interest referred to in this case.
The following conflicts are identified in the case:
• Self-interest of analysts vs. investors:
• Analysts tout investments that they believe are poor because:
• They are remunerated from profits for IPOs or trading in those investments
2. What additional rules should the SEC make?
The SEC should consider instituting additional rules such as:
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3. What should be included in the investor education that the settlement funds are earmarked for?
The objective here is to encourage discussion and thinking in the class about the knowledge
required by investors, and the investment community. The investor education program should
4. Was it appropriate for the New York Attorney General’s Office to have become involved in securities
regulation, or should this have been left to securities regulators?
Yes, Eliot Spitzer’s initiative was timely and had a beneficial impact. The problem arose in his
Useful Articles, Links, and Videos
Berenson, Alex & Andrew Ross Sorkin (December 22, 2002). “How Wall Street Was Tamed.” New York
“Eliot Spitzer Talks to Fareed Zakaria about Wall Street Bonuses [Video].” (January 17, 2010). Huffington
Business & Professional Ethics for Directors, Executives & Accountants, 8e
25. Loyalty, But to Whom? (Chapter 5, pages 355–357)
What this case has to offer
Too often, employees are misguided by thinking too narrowly and/or too short-term about the benefits
and costs of their actions. Many employees act to satisfy interests that conflict with the legitimate,
Teaching suggestions
This case identifies a common occurrence that students should be able to identify with. The reasoning
behind “take one for the team” or “help the team” “group think” is what keeps police and unions from
Discussion of ethical issues through the case questions
1. Loyalty is a highly desirable ethical value, and disloyalty is serious unethical and often illegal activity.
Explain how and to whom Grossmith, Horcsok, and Webb (G, H, and W) were disloyal.
G, H, and W were disloyal to UBS because they did not follow its ethical guidelines, which were
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2. Although Grossmith’s actions did not negatively affect the wealth of any client, why did UBS fire
him?
Glen was probably fired because he knowingly falsified documents, and in so doing broke
company policy, and market regulations. He was a two-time offender. Also the company
3. How should an employer like UBS encourage employee loyalty?
An employer needs to mount a comprehensive ethics program that includes clear guidance to
employees, with appropriate training, monitoring, rewards and sanctions. Above all, employees
Useful Articles, Links, and Videos
“Former UBS traders fined, suspended.” (July 18, 2005). CBC News,
Business & Professional Ethics for Directors, Executives & Accountants, 8e
26. Bankers Trust: Learning from Derivatives (Chapter 5, pages 358–361)
What this case has to offer
Bankers Trust is the story of a company that emphasized maximizing profit at almost at any cost.
Certainly, its employees placed earning commissions before the interests of their clients. Therefore the
Teaching suggestions/Discussion of ethical issues
I would suggest beginning the case by having someone in the class give a recap of it.
I would then ask what the class understood by the term derivatives, and how they think the derivatives
that BT was selling worked, in general. In this case, although the details of the contracts are not known
The next matter to deal with is whether BT was acting as a principal or an agent when selling the
derivative contracts to P & G. What did BT think, and what did P & G think? What does the class think?
If BT was acting as an agent, then P & G has the right to expect BT to act in P & G’s best interests. If BT
For normal clients of stockbrokers, the operating policy of seller beware is now in force rather than that
of buyer beware as it had been up until about 1990 or so. However, the question is: Was P & G a normal
client? The answer is no because it was a big multinational and had a massive portfolio including
derivatives that it had managed for years.
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I then ask: Did the BT salesman take unfair advantage of P & G even though P & G was an expert client,
and does that make any difference? Unfortunately for BT, according to the tapes, the BT salesman knew
Question 5 is intended to bring together the other issues of the case, including:
• Unethical corporate culture of BT
The buyer beware/profit at the expense of our clients’ attitude that was fostered at BT got BT
• Was P & G responsible?
No. Its internal policies were not followed, and its personnel did not understand the risk
• Privacy of taped conversations
Usually this is unethical. However, conversations are usually taped in the brokerage industry in
order to verify who said what at a later date. Moreover, the parties are told that the taping is
occurring and tacitly agree to it.
• RICO blackmail
By adding RICO charges to the lawsuit, P & G was upping the risk of loss from the lawsuit
Useful Articles, Links, and Videos
Holland, Kelley et. al. (June 13, 1997). “Cover Story: The Bankers Trust Tapes.” Business Week,