Ethics and Insider Trading

This morning’s Globe and Mail brought the news that Mitchell Finkelstein, a partner in a prominent Toronto commercial law firm has been accused of “tipping” – passing along sensitive confidential information to an old friend from university, who in turn profited from the information. The friend, Paul Azeff, works for the Canadian Imperial Bank of Commerce in their “World Markets” division. He, along with Korin Bobrow (a high school friend and colleague) have been accused by the Ontario Securities Commission of insider trading and suspended by their employer. Two employees of TD Waterhouse were also charged by the OSC in connection with the investigation and have been suspended by the bank.

It is important to note that none of these allegations has been proven.

Insider tipping and trading are both immoral and illegal and certainly no laughing matter. Still, I couldn’t help smiling as I read the Globe’s earnest claim that:

“Nothing in Mr. Finkelstein’s background would have suggested this turn of events.”

Now, insider tipping and trading are, by definition, crimes committed by insiders. That is, by people with access to information that is not yet public knowledge. People without access to privileged information – outsiders – are unlikely to run afoul of the law here. So the very “background” that made Mr. Finkelstein an insider – his private school education, his membership in the same fraternity as Mr. Azeff, and his position of trust in a prominent law firm – are the same things that made possible the accusations against him.

The Globe’s claim is also naïve in its implication that we should be able to find something in Mr. Finkelstein’s background that would allow us to make sense of the allegations. Surely, the reasoning goes, there must be some character flaw or formative experience that separates the vast majority of honest and rule-abiding lawyers and brokers from those who seek to profit from insider information. This idea is comforting, because once we have figured out what that difference is, we should be able to protect ourselves from the cheaters and fraudsters of the world. It hardly needs to be said that the idea is dangerous as well. Men like Bernie Madoff and Earl Jones were able to dupe as many as they did just because there was nothing in their backgrounds to indicate that they would engage in criminal acts.

If an employer can’t tell from a person’s background whether he or she is likely to commit an immoral act or a crime, what is to be done? One answer is to reduce the opportunity that any employee has to get their hands on information that might be profitable if passed along. This passage in another article about Finkelstein jumped out at me:

“In the report the OSC alleges that between November 2004 to May 2007 Finkelstein “actively sought out and acquired” non-public information either through his role as counsel with Davies or by conducting searches on company system.

If the allegations are true, then Finkelstein was able to gain access to sensitive information that he strictly had no right to have. Reduce the number of people who have access to such information, and the potential for insider tipping and trading will also be reduced. Furthermore, taking a leaf out of the Security Services book, every deal file that is of potential value should be marked as such and then meticulous track kept of every person who reads it.