Almost two years ago, I was invited to speak to the New York City Bar Association about the future of white collar crime enforcement.
I spoke bluntly about what I had seen in a little over a year as United States Attorney for the Southern District of New York. To the apparent surprise of many in the room, I observed publicly that insider trading appeared to be rampant.
That observation has been borne out over and over again in the two years since, much to the dismay and disgust of an increasingly frustrated public.
In case after case, wiretapped conversations between co-conspirators, the testimony of insiders, and admissions by the guilty have revealed that insider trading has permeated numerous industries, sectors, and geographical regions.
From coast to coast, the FBI and Securities and Exchange Commission have ensnared people not only at hedge funds, but at technology and pharmaceutical companies, consulting and law firms, government agencies, and even a major stock exchange.
What might be most astonishing (and disappointing) is that some of the most egregious securities frauds have occurred at institutions with seemingly robust compliance programs — at least on paper. They have occurred not at fly-by-night outfits but at prominent and powerful companies. And they have been enabled and perpetrated by the highest-flying money managers on Wall Street.
We have witnessed the most educated, successful, and monied professionals in the country put their companies — not to mention their own liberty — at risk by engaging in flagrant and foolhardy illegal conduct.
So, given the self-destructive nature of blatant insider trading, the question we face today is not whether insider trading is rampant but whether corrupt corporate culture is. The latest string of scandals in the news — revealing breathtaking displays of ethical bankruptcy — leaves many in my position, and a growing majority of the public, fearing that the answer is “yes.”
History has shown that one cannot legislate a culture of integrity. And yet, one of the paramount responsibilities and challenges of corporate leadership is to ensure such a culture. Without it, a troubling phenomenon that should be anathema to any company emerges: the penchant to test the legal and ethical line.
As the United States Attorney in the district that includes Wall Street, I have made it a point to speak to business groups, hedge fund associations, compliance officers, securities lawyers, and assemblies of directors at Fortune 500 companies. I’ve also spoken at many of the nation’s leading business schools.
These talks are not my version of a scared-straight program for white collar professionals, but they are not unlike the meetings that cops and prosecutors tasked with addressing the scourge of drug trafficking and violence hold in communities where such crimes persist.
To industry and business school audiences, instead of discussing the importance of staying in school or avoiding drugs, I talk about the importance of ethics and integrity in corporate culture.
On more than one occasion, when speaking to students about avoiding the ethical and legal line, I have been asked to specify exactly how far away from it people should stay. Frankly, it is the wrong question—like asking how many boxes you should check, how many pages your compliance policy should be, or how many minutes in the day you should spend thinking about ethics.
It’s like a driver constantly trying to game just how close to the legal alcohol limit he can come without getting a DUI. How long before that driver gets pulled over? Before he blows the legal limit? Or, God forbid, he hurts someone on the highway?
People in my position fear that in too many places and in too many quarters, a culture of minimalism has taken root. Ethical standards have been lowered to doing only what is required to avoid an enforcement action or a criminal charge, rather than focused affirmatively on doing the right thing, staying comfortably clear of the line, and earning a robust reputation for integrity and honesty. Minimizing probity to maximize profit is a sucker’s game, but it is played every day.
This impulse is troubling to prosecutors and outrageous to a public that expects American companies to aspire to more than the bare minimum. It does not suffice for a leader to give pro forma admonitions to behave honestly. A requirement to attend training sessions in the minutiae of the regulatory structure constitutes the bare minimum. So does the mere existence of compliance programs fly-specked by a hundred lawyers.
The aim should not be simply to cover bases and backs, but to build an ethical culture that becomes self-sustaining. One place a business might begin is with hiring practices. Hiring managers should insist on the importance of integrity; they must look for it and they must screen for it.
Another imperative is to create a culture in which good people say something or do something when they see bad conduct. And others must act when the whistle is blown, because it doesn’t matter how loud the whistle is blown if the players on the field are deaf or have chosen to wear earplugs.
Ultimately, in the everyday practice of business, every single employee, from the mailroom to the boardroom, must adhere to the highest standards. Profound personal integrity—repeatedly demonstrated and openly valued—must be the coin of the realm.
Financial fraud has been around forever. My office, which sits only steps from Wall Street, has been prosecuting white collar crime since its foundation more than 220 years ago, and we are busier than ever.
But notwithstanding the flourishes of the occasional journalist, no single prosecutor is, or can be, the sheriff of Wall Street. We certainly can’t police every transaction, every note, or every deal that makes up the modern system of markets.
The burden falls to business leaders and good corporate citizens, who every day can do far more to perpetuate good company and industry culture than any prosecutor ever can. Long before the Justice Department commences an investigation or issues a subpoena, board members, managing directors, compliance officers, and counsel will have had countless opportunities to guard against corruption and calamity.
And they must, because by the time federal prosecutors show up at your doorstep, it is often too late.
— Written by Preet Bharara, United States Attorney for the Southern District of New York