Archive for the ‘Ethics in IR’ Category

Inside information & avoiding illegal trading

July 3, 2013

Pillory woodcut2In medieval times, morality plays taught people through dramatic performance the difference between good and evil. A related phenomenon was the public punishment of malefactors by locking them in “the stocks.” The prisoner was immobilized in a wooden device, usually in the town marketplace, making his or her crime very public and subjecting the individual to ridicule and abuse as an example to all.

Today, we pillory people through online news and social media.

I thought of the stocks – the medieval kind – as I read how former KPMG senior partner Scott London pleaded guilty to providing inside information obtained through his auditing job for use in illegal trades. Fourteen times, Mr. London gave confidential info on KMPG clients like Herbalife and Skechers to a “friend” to make trades that ostensibly would rescue the man from a financial pinch. The friend, by the way, raked in $1.3 million and gave Mr. London a Rolex, some jewelry and about $50,000 in cash.

“I didn’t do it for money,” London said in a hallway outside [the] courtroom. “I did it to help out someone whose business was struggling. It was a bad, bad mistake.”

It’s not a mistake that will generate much sympathy – especially from professionals entrusted daily with nonpublic information. Now the 50-year-old Mr. London is held captive in the public square, recoiling from scorn and a possible prison term, wondering at what he has lost:

“It was probably the worst day of my life,” London said moments after entering the guilty plea. “Imagine what you do, you do it for 30 years, you go to school for it, and in a matter of weeks it’s all gone. It’s my fault.”

Yes, it was his fault: 14 illegal transactions amounted to 14 betrayals of trust. Each leak of earnings or M&A news corrupted the market.

I don’t share share this to throw more rotten vegetables at the guy in the stocks – but to say that investor relations people have a role to play in protecting ourselves and those around us. Illegal trading didn’t begin or end with Scott London. The SEC makes 50 to 60 cases a year nailing people for misuse of inside information as traders or tipsters. IR people are not immune to this conduct that brings scandal.

Trading on inside information can be a professional, organized crime involving stock-market sharks, such as the Galleon hedge fund guys. But it can also be a temptation for fairly ordinary people: a secretary, an accountant, a doctor helping in a clinical trial … and, yes, an IRO.

My feeling is that people in IR should not trade in our own stocks, or those of other companies about which we have nonpublic information. The NIRI Code of Ethics includes a pledge to “Not use confidential information acquired in the course of my work for my personal advantage nor for the advantage of related parties.” That seems to allow investing in one’s company or client as long as you’re not using confidential information. But for my personal investing, I’d rather not worry about when I know something or don’t. Apart from receiving (and holding) my employer’s stock as compensation when I was on the corporate side, my position is simply not to trade in companies I work with. Maybe that’s extreme, but I prefer to avoid being pilloried.

Also, investor relations professionals should seek clear policies to prevent trading on nonpublic information by everyone in our organizations – and periodic reminders to keep people well-warned.

What’s your take on IR people trading, and on cautioning co-workers?

© 2013 Johnson Strategic Communications Inc.


Cowboy ethics

February 23, 2010

As an American child of the Fifties and Sixties, I grew up on westerns on TV and in movie theaters. John Wayne, Marshal Dillon in “Gunsmoke,” the “Bonanza” Cartwrights. Good guys in white hats. Not until recently, though, did I hear about “cowboy ethics.”

It seems that a veteran institutional investor, Jim Owen, a former partner in NWQ Investment Management, has started a nonprofit Center for Cowboy Ethics and Leadership and written a book called Cowboy Ethics: What Wall Street Can Learn from the Code of the West, among others.

I ran across cowboy ethics belatedly from a news story on some people in Wyoming trying to write some of this philosophy into the state’s statute books.

If you’ve got a bit of cowboy in your background, you can learn the basics of cowboy ethics from Owen’s Ten Principles to Live By. I’ll share three of them:

  • Ride for the brand.
  • Talk less and say more.
  • Remember that some things aren’t for sale.

In an age of corporate scandals, revisiting your core values seems appropriate.

Loose lips sink … IR

October 19, 2009

loose-lips-sink-shipsThe latest Wall Street scandal, an insider trading case against billionaire Raj Rajaratnam and his hedge fund firm Galleon Group, holds implicit warnings for investor relations professionals: Beware the aggressive trader seeking an informational “edge” to trade on, and never ever get in bed with a tipster.

Today’s Wall Street Journal (“Colleagues Finger Billionaire”) reports that, according to an SEC complaint, an employee at an investor relations firm that counts Google among its clients allegedly fed inside information on Google’s earnings to a Galleon tipster, then tried to collect a six-figure quarterly fee to keep providing tips:

In the case of Google, the SEC civil complaint said that a person the agency identified as Tipper A received information in 2007 about an impending earnings shortfall from an unnamed employee of Market Street Partners, a San Francisco investor-relations firm. The SEC complaint said that Tipper A provided the information to Mr. Rajaratnam and that Galleon executed trades designed to profit on a decline in Google stock, netting $9 million.

The SEC complaint said the informant at Market Street demanded $100,000 to $150,000 a quarter to keep supplying Tipper A with information, but Tipper A refused and the informant stopped providing tips.

Google declined to comment. Market Street said it hadn’t been contacted by any authority, adding that it fully supports the prosecution of insider trading and will provide any necessary aid in the investigation.

Wow. If you crave more detail, read the SEC complaint.

To me, the bottom line is careers ruined … credibility lost … and crime doesn’t pay. The source of the tip, the traders, any middlemen in between – all are tarnished. And IR takes a hit, right along with an allegedly crooked gang of traders.

Confidentiality and trust are the foundation of investor relations. They are the basis of a relationship between a company and its in-house IRO or outside IR consultant. There is no more basic rule of ethics in IR: Do not discuss material nonpublic information with anyone who is not an authorized insider in the disclosure process.

We’ll have to watch for more information on this case. The SEC allegation that a Market Street Partners employee sought six-figure payments for inside information goes way beyond an inadvertent slip of the tongue, although neither Market Street nor its employee has been charged in the insider trading case.

(Update: Reuters reports on Oct. 22 that Google has suspended the services of Market Street. A lawyer for the IR firm says it is cooperating with authorities and considering whether to pursue legal action against a former employee.)

Deliberate tipping for profit is an obvious criminal act. Accidental tipping probably is a greater danger for most investor relations professionals. The threat of sloppy handling of information leading to insider trading should be discussed more often – as a repeated warning – within companies and in the IR community.

It’s critical to maintain the bright line that separates public information from nonpublic – to talk about what’s public and keep lips sealed when it is nonpublic.

Loose lips do sink – among other things – investor relations.

IR as a mystery thriller

August 22, 2009

Investor relations as a profession doesn’t often make Page 1, but today’s Wall Street Journal casts IR in a starring role in Deutsche Bank‘s covert maneuvering against a dissident shareholder and courtroom enemy.

“Banker, Gadfly, Lawyer, Spy” is a mystery thriller worthy of a John Grisham novel. For IROs, the story is just that: a good yarn to read on a late-summer weekend. Entertainment, unfortunately at the expense of errant corporate staffers.

The story has everything: a private investigator with two code-named teams, rich and powerful enemies in German corporate suites and a Mediterranean isle, a young lawyer suspected of posing in a job interview to gather intel at a plaintiff’s law firm, even an elusive Brazilian seductress. Too bad it’s not fiction.

Deutsche Bank’s head of investor relations was let go when the corporate snooping and surveillance became a scandal, and there are ongoing investigations – not to mention that litigious shareholder, a target of the bank’s “Magnum PI” efforts.

By the way, Deutsche Bank issued a press release July 22 with its own somewhat dry version of what it has found looking into the company’s snooping activities. The bank said the “incidents originated from mandates initiated to achieve legitimate goals, but, during the course of these mandates, the external service providers retained by the Bank engaged in questionable activities.”

IR people should read today’s WSJ piece, simply because IR doesn’t usually make headline news. You might even be prepared to tell co-workers, “No, we don’t generally spy on shareholders (or anyone else).” There is no practical guidance in this story for doing the actual job of IR – other than an implied warning.

It’s a cautionary tale that says don’t get caught up in a corporate “battle” that later will be viewed as corporate wrongdoing (see last month’s posts, Someone should’ve said no and On the ethics front …). The messy consequences are sad. After all, no one wants to wind up on Page 1 of the Wall Street Journal this way.

On the ethics front …

July 22, 2009

Investor relations professionals need to stand on our own ethically, thinking through and following our convictions on what’s right or wrong. The Wall Street Journal brought a reminder yesterday of the need for personal responsibility with news that the head of investor relations for Deutsche Bank has been dismissed.

You may remember the story earlier (“Someone should’ve said No“) about Deutsche Bank hiring private investigators to spy on members of its management and supervisory boards – and an activist shareholder.

Now the tale unfolds further with news of the firing of two executives: Deutsche Bank’s head of investor relations and head of corporate security in Germany. One of four surreptitious surveillance actions cited in press reports involved a dissident shareholder and a media mogul who was in a legal fight with the bank.

To be clear, I have no first-hand knowledge and wouldn’t attempt to judge what Deutsche Bank or its people did. But the reputational consequences, from a corporate and personal standpoint, are obvious. Yesterday’s WSJ headline said “Deutsche Bank Fires Two in Spying Probe.” The story continues to dribble out, with more details in today’s WSJ. In Germany, where privacy and “big brother” tactics are a sensitive topic, newsmagazine Der Spiegel has aggressively reported this story.

My point on ethics and personal responsibility is this: In the heat of battle, when the company is under attack and the world looks like “Us vs. Them,” be careful. Go back to your core principles: telling the truth, obeying the law, treating others as you would want to be treated, whatever convictions shape your outlook on life. Seek guidance in places like the NIRI Code of Ethics: Although codes won’t offer a specific rule for something like hiring a private eye, they do provide principles.

And consider how any action you take might appear in the harsh light of public disclosure a year or two later. Your responsibility to decide on your actions isn’t erased because you’re part of a larger corporate staff. Taking a stand just might save the company from serious reputational damage. And, down the road, it might keep you out of a headline that says “… Fires Two in (Whatever) Probe.”

Someone should’ve said no

July 6, 2009

Well, there’s knowing your shareholders – and then there’s going way too far.

The German magazine Der Spiegel reports today that the country’s largest bank, Deutsche Bank, hired private investigators to look into members of its management and supervisory boards – and a pesky shareholder.

To be sure, the bank was investigating information leaks it saw as threatening – but it seems obvious someone should have said “No.” Now, the bank faces reputational damage, scrutiny of top executives’ roles – and possible legal action.

A 2001 case involved a union representative on the company’s supervisory board, suspected of leaking earnings info to the press. In 2006, the bank investigated contacts between management board members and German media mogul Leo Kirch, who was tangling with the bank legally. Among the targets, Spiegel says:

The bank also had external helpers investigate a shareholder believed to have links with Kirch – Michael Bohndorf, a lawyer who resides on the island of Ibiza. The investigators compiled detailed reports on his movements and even looked into whether he had any personal weaknesses: alcohol, gambling, women? One insider reports that the agency resorted to hiring women to test him.

For years, Bohndorf has been annoying Deutsche Bank by asking dozens of questions at annual shareholder meetings and taking legal action if his questions aren’t answered. The bank has already informed Bohndorf of the spying operation and apologized for it.

Two other German companies, Deutsche Telekom and Deutsche Bahn, face spying scandals. American firms have fallen into this trap in the past.

When the company is in the heat of battle – litigation, proxy fight, M&A contest – a mood of paranoia can take over in the executive suite. But when it comes to violating the law – or doing something that will look stupid in The New York Times or Der Spiegel – someone on staff should be saying “No. Don’t go there.”

The sanity check, sometimes, might even come from investor relations.

Stewardship for shareholders – our mission

October 1, 2008

One of the saddest news stories of the financial crisis, “Loyalty Pays a Bitter Dividend,” appears today in The Wall Street Journal – a reminder that a public company is a stewardship, a relationship in which the owners entrust assets to a management team for safekeeping, profitable use and growth.

The piece leads off with a widow in her 70s who owned stock in a Mississippi bank for many years. Through a series of mergers, that stake morphed into shares in the mighty Wachovia Corp. Owning stock in a “local” bank remained a point of pride, and the dividends made a very substantial contribution to this widow’s livelihood. Until 2008.

On Monday, Wachovia fell victim to the Wall Street crisis. A forced sale of its banking assets may leave some financial services in the Wachovia name, but not a bank. (Update: At week’s end, Wells Fargo & Co. offered a sweeter deal for Wachovia than Citigroup, which is part of the would-be forced sale.) At this point, the widow’s stock is worth something – but a shadow of what it was. The dividend? Well …

According to the Journal, “Mrs. Pace said her son recently reassured her that if things get really bad, she can move out of her home and into his basement, which has a window. Then she began to cry again.”

The paper comments:

The faith of long-term holders is now being punished. … Few investors realized the danger that accompanied banking’s heady growth. Once-stodgy institutions were dabbling in exotic new securities based on high-risk mortgages, leaving them exposed when the housing bubble collapsed.

The crisis says something to all executives: Our core mission is to be faithful stewards, actively serving those long-term shareholders. To investor relations professionals, this argues that companies should proactively analyze and clearly disclose risks – and changes in risk.