One the definitions of law emanates from an instrumentalist view of the law. According this view, the law is regarded as an instrument used to serve a certain purpose. In other words, the law is a tool that is used to facilitate the attaining of certain objectives. When applied to a societal context, the instrumentalist view of law regards the law as an instrument that is used to attain and maintain order in a particular society. In any given society, there are many activities that take place. Where such activities are allowed to take place haphazardly and without regulation, then there is bound to be chaos. The end result of such chaos is that it will almost be impossible to undertake any meaningful activity in such a society. One of the activities that is prevalent in many countries in the world today is business. The business field in itself is very diverse as it comprises of numerous players. Such players may include small scale players and large scale players, domestic players and international players among many other classifications. If all these players were allowed to operate as they pleased, then the business field would arguably be highly disorderly. It will become a concrete jungle where all will be trying by hook or crook to thrive. The law plays the role of regulating business practices. It does this by helping to create a certain minimum set of standards that should be expected of every business entity in a particular geographical region where the relevant law is applicable. In the United States, one of the demands that the law places on both large and small corporations is that they must desist from all forms of insider trading. Recently, one of the large firms in the country pleaded guilty to the crime of insider trading. This case will be the basis of the discussion in this submission. The submission will subsequently be guided by the thesis statement that the law ought to provide more opportunities for lifting the veil of incorporation so as curb the unethical and unlawful practice of insider trading.
The case that is the subject of this study involves one the largest and well established firms in the United States, SAC Capital. SAC Capital is owned by Stephen A Cohen, a highly successful businessman who was ranked by Forbes as the fortieth most wealthy American with a fortune of about $9 billion. Recently, SAC was in the news for all the wrong reasons. For about ten years now, SAC Capital had been the subject of investigations regarding suspicions of insider trading in the firm. It is this long running investigation that reached an anti-climax when advisors of SAC Capital pleaded guilty to fraud charges that had been leveled against the firm. These charges were based on the findings of the investigation. The guilty plea can be termed as an anti-climax because the normal course of such investigations is that the charges that usually emanate from the investigations provide the basis for holding a full trial. It is instructive to note that in the SAC Capital case, the presiding judge is yet to give her determination as to whether she will accept or reject the plea. It also instructive to note that in the case, the lead prosecutor contended that had the case gone to full trial, more evidence would have been adduced to highlight the fact the rot in SAC Capital went beyond the six persons who had previously pleaded guilty of charges of insider trading that had been leveled against them. It is the admissions by these six that catapulted SAC Capital to plead guilty to the charges of insider trading lest it risks having more of its dirty linen washed in the public. The plea agreement was entered in a deal between the government and SAP Capital where SAC Capital was to plead guilty and pay about $ 2 billion as a penalty for having allowed insider trading to take place within the corporation for a period of over ten years.
My personal opinion is that SAC Capital’s action of condoning and perpetuating insider trading is abominable. It is a disgrace not only to the firm but all other stakeholders who in one way or the other participated in or facilitated the commission of such a heinous business crime. It even gets more disturbing when one takes cognizance of the fact that this unethical and unlawful practice has been a way of life at SAC Capital for over ten years. Apart from being a violation of the law, the SAC Capital incident is a clear illustration that the firm had poor corporate governance practices. It is a tragedy of unimaginable proportions when considers the magnitude of the insider trading. The fundamental question that begs to be answered is what exactly triggered and facilitated the blatant violation of the law by such a large and well known firm for over ten years.
Perhaps an important starting point in looking for answers could be to define insider trading. As the name suggests, insider trading refers to trading activities undertaken by individuals in a company who have access to information that other members of the public do not have. Possession of such information gives them an undue advantage as they are able to base their decisions which other members of the public do not have. Being an in investment firm, SAC Capital used insider trading to get ahead of the pack and in the process post impressive returns. This was flagrant violation of one of the laws of business which states that while one can strike hard blows, they should not be low. SAC Capital chose to strike the low blows so as to gain undue advantage. Indeed, the thinking behind the SAC Capital executives involved in the scum must have been that they would easily be protected by hiding under the veil of incorporation. In other words, SAC Capital being a body corporate was a separate legal entity from them. It was a juridical body. The law would only thus seek to impose sanctions against the corporation and not seek to establish who the real culprits were. However, this was not the situation. The veil of incorporation was lifted and individuals as well as the corporation were held liable for the activities that had taken place in the firm.
The SAC Capital case generated a lot of public interest. This was arguably illustrated by the packed courtroom during the plea agreement by the firm. A large segment of the population was of the view that it is wrong for large corporations to always think that they can find their way around the law. To that extent, there were those who argued that SAC Capital should have been brought fully to book for its actions through a trial. The general public opinion is that big firms should lead in setting industry standards and establishing and adhering to international best practices. Furthermore, they are expected to abide by the laws of the land. They must be the big sisters or big brothers and set good examples for other players in the market to follow. Any departure from these would have detrimental effects to the smaller players and to the industry at large. This is because failure to detect the violation of the laws may give the firm which violates the law undue advantage or where it remains undetected, it may lead to more firms adopting practices that contravene the law. The wider society also exhibited its displeasure with the actions of SAC Capital through the withdrawal of many former clients of the firm. Members of the public expect to deal with firms that are honest in their undertakings and which follow the rules of fair competition. As illustrated by the SAC Capital case, where a firm opts for shortcuts and unlawful and unethical practices and this eventually comes to light, even clients who had hitherto associated with the firm will move away. They will withdraw all their investments from the firms and move them to firms that are law abiding. The rationale behind this is simple. Investors seek safe avenues for their investments. Corporations which violate the law are arguably not safe avenues of investment. They risk constant run-ins with the government and this does not augur well with investors.
The important lesson to be learnt from the SAC Capital case is that there is need for greater surveillance and stronger corporate governance regimes so as to forestall the occurrences of such incidences. It is a battle which will be difficult to win but which giving up cannot be an option; the results of giving up may just be too grave to bear.
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