PART 1 CASE STUDY: Insider Trading and Fiduciary Duty

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PART 1 CASE STUDY: Insider Trading and Fiduciary Duty.

One of the most famous cases of insider trading implicated Michael Milken, Dennis Levine, and Martin Siegel, all executives of Drexel Burnham Lambert (DBL), and the company itself.26 Ivan Boesky, also accused, was an arbitrageur, an outside investor who bet on corporate takeovers and appeared to be able to uncannily anticipate takeover targets, buy their stock ahead of time, and earn huge profits.

Everyone wondered how; the answer was that he cheated. Boesky went to the source—the major investment banks—to get insider information. He paid Levine and Siegel to give him pretakeover details, an illegal action, and he profited enormously from nearly every major deal in the merger-crazy 1980s, including huge deals involving oil companies such as Texaco, Getty, Gulf, and Chevron.

The SEC started to become suspicious after receiving a tip that someone was leaking information.

Investigators discovered Levine's secret Swiss bank account, with all the money Boesky had paid him.

Levine then gave up Boesky in a plea deal; the SEC started watching Boesky and subsequently caugh Siegel and Milken.

The penalties were the most severe ever given at the time. Milken, the biggest catch of all, agreed to pay $200 million in government fines, $400 million to investors who had been hurt by his actions, and $500 million to DBL clients—for a grand total of $1.1 billion. He was sentenced to ten years in prison and banned for life from any involvement in the securities industry. Boesky received a prison sentence of 3.5 years, was fined $100 million, and was permanently barred from working with securities. Levine agreed to pay $11.5 million and $2 million more in back taxes; he too was given a lifetime ban and was sentenced to two years in prison.

Milken and Levine violated their financial duties to their employer and the company's clients. Not only does insider trading create public relations nightmare, it also subjects the company to legal liability.

DBL ended up being held liable in civil lawsuits due to the actions of its employees, and it was also charged with violations of the Racketeer Influenced and Corrupt Organizations (RICO) Act) and ultimately failed, going bankrupt in 1990.

(As a note of interest regarding the aftermath of all of this for Milken, he has tried to redeem his image since his incarceration. He resolutely advises others to avoid his criminal acts and has endowed some worthy causes in Los Angeles.)

 

AFTER READING THIS CASE STUDY IN PART 1, ANSWER THOSE QUESTIONS:

 

* Employers in financial services must have stringent codes of professional behavior for their

employees to observe. Even given such a code, how should employees honor their fiduciary duty to

safeguard the firm's assets and treat clients equitably? What mechanisms would you suggest for

keeping employees in banking, equities trading, and financial advising within the limits of the law

and ethical behavior?

 

* This case dominated the headlines in the 1980s and the accused in this case were all severely fined

and received prison sentences. How do you think this case might be treated today?

 

* Should employees in these industries be encouraged or even required to receive ethical certification

from the state or from professional associations? Why or why not?

 

 

PART 2 CASE STUDY: Non-Compete Agreements.

 

After an investigation by then-New York attorney general Eric Schneiderman, fast-food franchisor Jimmy

John's announced in 2016 that it would not enforce non-compete agreements signed by low-wage

employees that prohibited them from working at other sandwich shops, and it agreed to stop using the

agreements in the future. Jimmy John's non-compete agreement had prohibited all workers, regardless

of position, from working during their employment and for two years after at any other business that

sold "submarine, hero-type, deli-style, pita, and/or wrapped or rolled sandwiches" in a geographic area

within two miles of any Jimmy John's shop anywhere in the United States.13

Schneiderman said of the agreements, "They limit mobility and opportunity for vulnerable workers and

bully them into staying with the threat of being sued." Illinois Attorney General Lisa Madigan had also

initiated action, filing a lawsuit that asked the court to strike down such clauses. "Preventing employees

from seeking employment with a competitor is unfair to Illinois workers and bad for Illinois businesses,"

Madigan said. "By locking low-wage workers into their jobs and prohibiting them from seeking better

paying jobs elsewhere, the companies have no reason to increase their wages or benefits."14

Jimmy John's has more than 2,500 franchises in forty-six states, so its agreement meant it would be

difficult for a former worker to get a job in a sandwich shop in almost any big city in the United States.

 

AFTER READING THIS CASE STUDY IN PART 2, ANSWER THOSE QUESTIONS:

 

* Other than being punitive, what purpose do non-compete agreements serve when low-level

employees are required to sign them?

 

*Suppose an executive chef or vice president of marketing or operations at Jimmy John's or any large

sandwich franchise leaves the firm with knowledge of trade secrets and competitive strategies.

Should he or she be compelled to wait a negotiated period of time before working for a competitor?

Why or why not?

 

*What is fair to all parties when high-level managers possess unique, sensitive information about

their former employer?