Academic journal article Fordham Journal of Corporate & Financial Law

Does the Law Encourage Unethical Conduct in the Securities Industry?

Academic journal article Fordham Journal of Corporate & Financial Law

Does the Law Encourage Unethical Conduct in the Securities Industry?

Article excerpt

A 2002 Citigroup Inc. memo, released as part of a Florida lawsuit, shows that the bank's own analysts were reluctant to publish less-biased research over concerns of a backlash from its investment bankers.

John Hoffmann, the former head of equity research at Citigroup's Salomon Smith Barney unit, wrote in March 2002 that the firm's analysts were considering an increase in the number of "negative" ratings on stocks. In the same memo to Michael Carpenter, then head of Citigroup's corporate and investment bank, Hoffmann said doing so would threaten more than $16 billion in fees and risk putting the firm at a disadvantage.

"Analysts have been told repeatedly that the primary goal of the firm is to get our equity underwriting market share ranking into the top three," Hoffmann wrote. "The equity research directors question the investment bank's ability to accept stricter rating standards at the expense of revenues."1


Are corporations committed to compliance with law? The Principles of Corporate Governance2 demand a corporate commitment to compliance with law. The obligation exists even when corporate profits are not maximized. Cost-benefit evaluations in decisions on legal compliance are rejected. Do these Principles realistically reflect corporate activity in the market?

This article tests these views against recent evidence of corporate conduct. Two issues are explored: (a) whether law is determinative of corporate conduct falling within its scope, and (b) what role cost-benefit analysis plays in corporate decisions on legal compliance. Part One of the article explores the ethical obligation to comply with law that U.S. society has recognized for corporate actors. Two competing perspectives are examined. First, the viewpoint adopted in the Principles of Corporate Governance is presented. This viewpoint posits that law is determinative of corporate conduct. An absolute obligation to comply with the law's requirements is deemed to exist. This requires a commitment to legal compliance regardless of the impact on corporate profits. A second viewpoint is that found in complexity theory. Complexity theory contends that human behavior, and, in turn, corporate behavior, is influenced by many factors.3 Law is one influence, but it is not the sole influence and is not necessarily the determinative influence. This second perspective is not a normative perspective. Rather, it examines how corporate decisions are actually reached.

Part Two of this article tests these two viewpoints by examining evidence of actual market conduct. It explores whether corporate conduct demonstrates a commitment to legal compliance, including a commitment to the law's underlying purpose, even when corporate profits are not maximized. The key finding is that corporations are not committed to a broad ethical obligation to comply with the law including an obligation to serve the law's purpose. Legal mandates are narrowly construed and sought to be evaded. Underlying public policies are typically ignored. In sum, law is not serving as the determinant of corporate behavior.

Part Three of this article then examines the role cost-benefit evaluations play in influencing corporate behavior under various legal regimes. The influence of cost-benefit evaluations on corporate behavior has been cast aside and, therefore, ignored under the Principles of Corporate Governance. However, the evidence strongly suggests that corporations are not ignoring cost-benefit evaluations when making decisions on legal compliance. In reaching this conclusion, the role of behavioral tendencies and decision making heuristics are explored to ascertain their influence on corporate cost-benefit evaluations. The conclusion drawn is that they cause corporate actors to view noncompliance with legal mandates as a reasonable decision. As a result they do not induce a strong commitment to legal compliance. Part Three of this article then offers an alternative approach to prevailing legal regimes - an alternative that accepts and embraces cost-benefit evaluations. …

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