The Ethics of Insider Trading

Two Wall Street Journal reporters broke the story last week of insider-trading by a long-time employee of the Food and Drug Administration (FDA). According to the story by reporters Alicia Mundy and Brent Kendall, the SEC filed civil charges against Cheng Yi Lang, an FDA employee since 1996, who allegedly made as much as $3.6 million trading drug company stocks based on confidential drug-approval information.  The SEC claims that Cheng illegally traded in advance of at least 27 different FDA announcements involving 19 publicly traded companies. The SEC and Justice Department charged him with trading shares dating back to 2006 of companies whose drugs were used for colon cancer, schizophrenia, insomnia, severe constipation, osteoarthritis and heart disease (see: http://online.wsj.com/article/SB10001424052748704471904576231000918221870.html#printMode).

I recently blogged (http://bit.ly/fORmb9) about the biggest insider trading case in quite some time that was filed by the SEC against Rajat Gupta, a former member of the board of directors of Goldman Sachs. Gupta had resigned last year just before news broke of his alleged involvement in the Galleon insider trading ring. The SEC charged that Gupta helped Galleon rack up more than $17 million in profits and avoid losses on illicit Goldman trades during 2008, thanks to information Gupta fed Galleon founder Raj Rajaratnam. Gupta also made Galleon $570,000 by leaking information from a 2009 Procter & Gamble board meeting.

Insider trading is arguably the most egregious act that can be committed by any employee. It violates one’s fiduciary duty to the public and jeopardizes the public trust. In the Cheng case, his actions bring into question the FDA drug-approval process. It was a selfish act carried out without concern for the consequences of such behavior on the FDA’s reputation and the efficacy of reported information from drug trials. Indeed, the public health could have been jeopardized if Cheng somehow changed reported results and acted on the altered information to buy or sell stocks. His actions violate the concept of having a level playing field in stock trading because outside investors do not have access to the same inside information.

An important perspective on this issue is provided by Chris MacDonald, who writes the very popular Business Ethics Blog. In Chris' March 30 blog (see: http://businessethicsblog.com/2011/03/30/insider-trading-at-the-fda) he identifies another ethical worry: " if chemists working for the FDA take a personal financial interest in the fate of various approvals, that could quite easily corrupt the work they do. In other words, it puts such a chemist into a conflict of interest." Quite correct. Such conflicts can cloud objective judgment and influence decision making.

I like quotations. I believe a good quote succinctly makes a point about an action or behavior that gets to the heart of the matter and is memorable. H. Jackson Browne, an American author best-known for his inspirational book, Life’s Little Instruction Book,” is quoted as having said: "Our character is what we do when we think no one is looking." Thomas Jefferson may have said it best: "Whenever you do a thing, act as if all the world were watching." The point is the same. Ethical people do not need laws or rules to guide their behavior. They are guided by an inner sense of what is the right thing to do informed by virtues such as honesty, integrity, and trustworthiness.

Blog by Steven Mintz, aka Ethics Sage, April 6, 2011