I had the honor of being invited to speak at the annual symposium for the Wayne Law Review two weeks ago. The event, which focused on Corporate Counsel as Gatekeepers, was well organized and attended–and also very stimulating. Speakers included Tony West as a keynote, a few of us academics, and a bunch of current and former practitioners–prosecutors, in-house counsel, and outside counsel.
My presentation focused on a story that bugs me–a story built on an experience I had in practice. In the story (which modifies the true facts), an executive flagrantly violates a securities trading compliance plan that I drafted in connection with a subsequent transaction that I worked on for the executive's firm. Specifically, the executive informs a friend about the transaction the day before it is announced, believing that the friend will never trade on the information. The friend trades. The incident results in a stock exchange and Securities and Exchange Commission (SEC) inquiries. No enforcement is undertaken against the firm. However, the executive signs a consent decree with–and pays a cash penalty to–the SEC and, together with the firm, suffers public humiliation via a front-page article in the local newspaper (since the SEC would not agree to forego a press release). This fact pattern gnaws at me because I wonder whether there is anything more legal counsel can do to prevent an executive from violating a compliance policy to the detriment of himself and the firm . . . .
To answer this question, it seems prudent to identify a cause for the executive's noncompliant behavior. Importantly, in the story, the executive does not set out to do harm to himself or the firm. His failure to comply with the policy was not intentional. He may not even have engaged in behavior that should lead to a successful enforcement action for unlawful insider trading.
In my presentation, which I am converting into an essay for publication in the law review, I explore briefly three possible causes for the executive's transgression. I first consider whether the executive may have failed to understand the policy or its relationship to legal compliance. Next, I assess whether the executive's noncompliance is attributable to his lack of respect for the law or lawyers. Finally, I look to behavioral psychology and cognitive bias research for a possible answer. I do not reach a definitive conclusion as to which of the three potential explanations is the actual cause of the executive's wrongdoing in my examplar case. Prescriptions addressing all three potential causes comprise the remainder of the essay.
Have any of you experienced similar incidents in practice? Have you given thought to why the executives with whom we work in guarding the corporate bastion stray off the beaten track–a track prepared for their safety and that of the firm–in reckless (rather than willfully malfeasant) ways? I am all ears. And if you have read anyone's work that you find especially helpful on anything related to my thesis, please let me know. I want to take into account a broad array of literature in ferreting out and addressing the potential causes and solutions.