When energy giant Enron Corp. collapsed last December, tales of false accounting, fraud and cover-ups were running rampant. The Enron investigations were followed by insider trading scandals.
Last night, students gathered to understand what is behind "America's Season of Corporate Scandal," a lecture by Law and Real Estate and Management Professor William Tyson, who claimed, "I save [newspaper] clippings on former students who have gone to jail."
Over dinner, Tyson explained the ethical line Enron was skating, the history of insider trading and why the U.S. judiciary system is ill-equipped to deal with the issues.
"Enron kicked things off," explained Tyson. Enron did "something wrong to make the stock price go up and [sold] before the bottom [fell] out -- classic inside trading." Enron inflated its revenue by selling stock to itself and hid its losses, he said.
Then, as Tyson pointed out, Enron blocked employees from selling stock while the officers and directors "sold like crazy."
Up to this point, before the cover-ups began, one could argue that Enron had done nothing illegal, according to Tyson. He said, "I personally think this is not an ethical problem, but a legal one."
Which is a problem in and of itself -- because as Tyson explained, there is no law expressly prohibiting insider trading.
"It all started when Congress enacted security statutes in 1933 after the Great Depression," Tyson began. Congress delegated power to the Securities Exchange Commission to make regulations regarding security exchanges.
In 1942, SEC used this power to mandate that entities must cease and desist in fraudulent conduct while buying and selling. In a case tried in Philadelphia, the federal courts added to the SEC mandate that "non-disclosure when there is duty to speak is fraud."
After two insider trading cases in the early 1980s, the old theory of insider trading, which, according to Tyson, was "insider trading is wrong," was changed to the Misappropriation Theory -- "if information is stolen and used to trade, it's a violation [of federal law]."
This would be fine, according to Tyson -- except that current law has nothing to do with insider trading.
"Insider trading is criminal," Tyson explained, "but it is not fraud. The U.S. forces [the existing law] to fit all problems."
He went on to say that the current law "does not describe insider trading... we're constantly trying to make insider trading fraud because [the current law] is the only weapon we have."
Is there a solution to the problem?
Tyson said he believes that the government must "eschew fraud rubric and start over with insider trading policy." Justin Lubell, a College freshman agreed.
"It's surprising because what Enron did was legal but not ethical," he said. "I think the SEC needs to clarify its stance on ethical issues. It needs to create laws that clarify what is illegal and what is ethical."
Most attendees agreed that the U.S. needs to reshape its policies.
