SAC Capital: Insider Trading Scandal (2014)

Controversy

SAC Captial Advisors logo

It is hard to escape that fact that in today’s society there is always scandals in business concerning ethics and morals within a company or a company with respect to their customers. Every year there is a handful of cases that are heard upon that call out some company’s or firms that make big news and big commotion. A big scandal concerning a firm called SAC Capital emerged in the past few years that was just settled in 2013. SAC Capital is a group hedge fund investors that was founded by Steven A. Cohen in 1992. Steven Cohen has a net worth of $9.4 billion dollars, which he used 20 million of his own capital to start the company.
A hedge fund is a limited partnership of investors that uses high risk methods, such as investing with borrowed money, in hopes of realizing large capital gains. The grounds for the scandal were due to insider trading. Insider trading is an illegal practice conducted on the stock exchange that gives a person an advantage through knowledge of private information. An example of this would be if someone is investing in a company and they find out by an inside source that the company is going to go bankrupt and they sell all their stocks before it is known to the public. This plays advantage to the person selling the stock since they are able to sell their stocks before they lose money. Before this scandal took place eight former workers for SAC Capital were criminally charged for insider trading. Six of those eight pleaded guilty. The prosecution led to SAC Capital pleading guilty to insider trading. This made SAC Capital the first large Wall Street firm to confess to criminal acts in this generation. SAC Capital paid a record large $1.2 billion in penalties and fines.

Individualism
There are a few ethical theories that can be applied and used to understand this case. Individualism (Friedman’s Economic Theory), Utilitarianism, Kantianism, and Virtue Theory are some ethical theories that can help explain or argue against the reasoning behind SAC Capital’s investors and their unethical behaviors. Individualism or Friedman’s Economic Theory only goal of a business is to maximize its profit for the owners and its stakeholders as long as everything it is not doing anything illegal (Salazar). In SAC Capital’s case the investors were trying to maximize profit for the owners and stakeholders however they were doing so illegally. Individualism states that as long as everything that is going on is legal it is okay. Doing things illegally does not help anyone or any company out in the long run. At some point when illegal behavior is going on, it is noticed and confronted immediately. When this occurs it takes away from customers, as well those customers may turn on the company and not have trust in the company anymore.

Utilitarianism

Steven Cohen of SAC Capital, the man behind the scandal

Utilitarianism applies the value of happiness in situations to the greatest amount of people. Also know as “an ethical tradition that directs us to make decisions based on the overall consequences of our acts" (Desjardins 24). In other words if the actions are for the greatest amount of peoples happiness then it would be considered ethical. In SAC Capital’s case a utilitarianism approach would not be an answer for the actions committed. SAC capitals investors were just thinking in themselves and their well being. It was known to some that Cohen made about $900 million annually. And for “In good times, the fund’s top talent earned as much as $100 million annually”, showing how that some of the workers would perform such illegally actions to make personal gains. In a competitive industry doing some illegal actions may be beneficial in a few eyes.

Kantianism
Another theory that could be compared to the SAC Capital scandal is Kantianism. Kantianism focuses on ethical behavior for the good of society with no personnel interest. This approach “emphasizes acting with respect toward all autonomous beings" (Salazar). Applying this to the case shows how self-interested and how egotistical was this firm with regards of making profits for themselves. The interest of the rest of the company including shareholders, other employees, and most importantly the customers were not taking into account. SAC Capital had history in insider trading and making profits for top executives disregarding others. In this case it led to a bad outcome as the firm had to admit to wrongdoings, which cost them a record amount of money. An outcome like this can affect a firm as a whole as they could have lost many customers and trust from their customers. Most unethical behavior leads to distrust causing turmoil with a company.

Virtue TheoryThe last theory is the virtue theory. This theory focuses on instilling and inspiring the right characteristics into people that would help them be ethical and act appropriately in society’s eyes. SAC Capital lack of compassion and duties to their customers and shareholders cost them in the long wrong. After this whole ordeal SAC agreed to a plea deal which cause them to “shut its doors to outside investors”, which was a big part of their company. Cohen and his advisors have to now open a new firm which is smaller and does not deal with many legal entities and will not be able to take money from external parties. The unethical practices by SAC Capital cost them millions not only from fines and penalties but by limiting their resources and abilities for the future. Unethical behavior has a lot more costs and downsides than just the money. Many other things like lost of trust and faith within a company will be lost, and in today’s society finding happy customers and returning customers is harder and harder to find. This brings up another interesting point that is, do these big firms really care if they are caught doing illegal and unethical things? These companies deal with so much money and so much profit that it does not matter if they gave up a few million or even $1.2 billion. Unethical practices occur all the time and it is becoming more and more part of today’s society unfortunately.


References

"After Scandal, SAC Capital Begins to Fade to Black." DealBook After Scandal SAC Capital Begins to Fade to Black Comments. N.p., n.d. Web. 15 Feb. 2014. <http://dealbook.nytimes.com/2014/02/02/after-scandal-sac-capital-begins-to-fade-to-black/?_php=true&_type=blogs&_r=0&module=ArrowsNav&contentCollection=Business%20Day&action=keypress®ion=FixedLeft&pgtype=Blogs>.

DesJardins, Joseph R. "Ethical Theory and Business." An Introduction to Business Ethics. 5th ed. New York, NY: McGraw-Hill/ Irwin, 2014. 23-37. Print.

"The Impact of the Settlement on SAC Capital and Cohen." DealBook The Impact of the Settlement on SAC Capital and Cohen Comments. N.p., n.d. Web. 15 Feb. 2014. <http://dealbook.nytimes.com/2013/11/04/what-the-settlement-means-for-sac-capital-and-cohen/>.

"SAC Capital Agrees to Plead Guilty to Insider Trading." DealBook SAC Capital Agrees to Plead Guilty to Insider Trading Comments. N.p., n.d. Web. 15 Feb. 2014. <http://dealbook.nytimes.com/2013/11/04/sac-capital-agrees-to-plead-guilty-to-insider-trading/>.

Salazar, Heather. Business Ethics Lectures. WNEU. Spring 2014.

Salazar, Heather. “Kantian Business Ethics,” in Business in Ethical Focus, ed. Fritz Allhoff and Anand J. Vaidya (Broadview Press, 2008).

"Steve Cohen." Forbes. Forbes Magazine, n.d. Web. 15 Feb. 2014. <http://www.forbes.com/profile/steve-cohen/>.

written by : Luis Agrait