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Legalize Insider Trading?

It is illegal as of today to use knowledge gained from a relationship with a publicly traded company to make decisions on whether to invest, not invest, or sell that stock. The history of this is that it gives an unfair advantage for those with the information to profit from being ahead of the curve on whether a stock will take off or plummet. This seems reasonable enough without giving it any deep thought or analysis. Why should those who know more be able to benefit from knowledge that regular people wouldn’t know? However, that has become scrutinized as of late when the question is raised that it seems a waste for people who do have information to be able to effectively use that information for their financial gain. There is also the argument that if this were to happen, the stock prices would change more rapidly, and this would signal the market and allow others to make better decisions about their investments without having insider information. 

In fact, Nobel Prize winner Milton Friedman himself was quoted as saying, “ You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that” (Benzinga.com). Looking reflectively on all that has happened with insider trading in the last decade alone, it certainly would seem that a lot of time, money, and energy is going into trying to catch people using information to make their stock trades. 

Another thought on the disadvantage of legalizing insider trading is that those who are not “in” will not use the market because they will see it as a game they are not a part of (Benzinga.com). Personally, I disagree with this. I work for a company that has a stock price over $1,700 per share and is a multi-billion dollar holding company. We have stock windows that open from time to time, and every time I consider investing, I decide not to as I work in the finance department and I know all sorts of things about the operations and future of our business. I don’t know that I know enough to completely predict what may happen, but the risk of being fined or imprisoned if I do happen to know the right thing and make the right moves is enough to dissuade me from even trying. So, perhaps if there was not the potential for crime involved more investors from different levels within an organization would invest. I can see both side of the coin on this, but the freedom to make a choice that with less fear of consequence would be liberating. 

A discussion about the level of risk that is involved in stock trades brings up interesting thoughts. Investors do give money to people that they don’t know and want them to do their best to maximize their investments - but if people are trading online with no agent, no one owes them any fiduciary duty that I can see. The article went on to say, “ We are not implying people should not trust those who issue or market these securities. But if they do, they should recognize that there is the risk that they may suffer a loss due to insider trading. It is a risk like any other one” (Newstex). I would have to agree, assessing the risk in this situation should still be the burden of the investor, and as long as they understand the rules of the game, what they choose to risk is up to them. 

After reading the opinion pieces and context of the idea to legalize insider trading, I think in an effort to give people putting the time in to gain the knowledge to utilize for their advantage is pretty realistic human nature, and that it would greatly reduce white collar crimes and the financial burden of the investigations of these cases. 

References 

Should insider trading be legalized? (2011, ). Benzinga.Com 

Guest post: A case for legalized insider trading (2012). . Chatham: Newstex.

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I found the citation you used about a breach of fiduciary duty not being able to be reasoned out of very interesting. I think that this is probably the only way that the law would be able to be consistent in upholding this concept. If a person who had breached a fiduciary duty was able to go to court and explain why they had done it, the integrity of the fiduciary duty would become irrelevant. There would be no reason for any person to believe that any fiduciary relationship could be relied upon, because if another, “better” reason came up, they would be put aside for that reason. 

 The idea of being able to have a legally up-hold-able framework for loyalty is a pretty amazing thing. There are so many circumstances in which it would be exceptionally difficult to put your trust in a stranger, or someone you know very well, and believe that they will truly act in your best interest. Especially for seniors who may have decreased faculties, or those who are wealthy who are unsure if they may be taken advantage of financially.

 Your particular case with the lawyer to get custody of your nephew would surely be a very intense situation where you depend on your lawyer to ensure the outcome best for him, and for you. Without having previously been in a situation such as that, it would be important to be able to find someone who represents themselves as having the skillsets that you desire, and a positive track record for success. Having to rely on data and not firsthand experience in a situation that is so emotional is certainly a difficult spot to be in!

 After learning about the duties, responsibilities, and liabilities of being a fiduciary, it certainly makes me want to be sure to appropriate represent both my abilities and limitations, and ensure that if I am a fiduciary that I uphold the five critical duties of a fiduciary. It is certainly a commitment and responsibility to serve in that role! Integrity, honesty and accountability are values that I would need to see from anyone I gave fiduciary power to for myself, as well.

Fiduciary Duties

A Fiduciary as the definition describes it seems like quite a simple concept, however as you begin to look at all the fiduciary duties that are owed to the principle and vice versa it seemingly is far more complex. As described in Sukys (2020), “A fiduciary relationship is a relationship based on trust. Such relationships exist—for example, between attorneys and clients, guardians and wards, trustees and beneficiaries, and board of directors and corporations” (p. 255). For this blog, the focus will be slightly more on principal—agent relationships. Also further described in Sukys (2020), “Agency is a legal relationship in which one party, the agent, transacts business for and under the control of the second, the principal…The principal must indicate in some manner that the agent is to act for and under the control of the principal” (pp. 609-610). Important to note is that all agency relationships are considered fiduciary relationships and that agency relationships are always consensual (Sukys, 2020, p.610).

           All that being said, there are some clearly defined fiduciary duties that an agent is said to owe his/her principal whether they are mentioned in the agreement or merely implied to include: obedience, loyalty, judgment, prudence, and skill, account for all property, and to perform work personally and communicate fully with the principle.

Fiduciary Duties an Agent Owes the Principal

Obedience

           As far as obedience, the agent must comply with any instructions given by the principal so long as they are reasonable and legal instructions and they relate to the agency agreement. That said, there is established boundaries in the relationship that the agent must act within referred to as the scope of authority. There are many examples in which if the agent acted outside those boundaries, they would be liable to the principal for any damages or injury suffered by the principal.

Loyalty

           The agent must always act in the best interest of the principal by maintaining loyalty and avoiding any conflict of interest. Further, ensuring that any confidential information acquired through the relationship be kept as such and not used to the benefit of the agent. You would think that the concept of acting in the best interest of the principal would be common sense but, agents might attempt to convince themselves that they are acting in the best interest of the principal when perhaps they are not. As mentioned in Samet (2008), “To minimize the risk of self-deception is to eliminate the process of deliberation that is most prone to be infected by it; that is, to prevent fiduciaries from asking themselves whether a transaction that serves their own interest is also good for their principals. When the law makes it clear that any (unapproved) conflict is illegitimate, the process of reflection which is so prone to being subverted by self-deception is stopped before it can even start its destructive course” (p. 765).

Judgment, Prudence and Skill

           This set of duties would seemingly be self-explanatory however, there are some differentiators from an agent who possesses the skills and knowledge required to carry out their obligations to the principle and someone who claims to be an expert. If someone is an expert for example a doctor or an attorney, they would be required to carry out their duties by using expert judgment, prudence, and skills such as those that would be possessed by others that previously had been admitted into those professions. The important thing to note is whether the agent is considered an expert or not, they still may be held liable for losses or injuries caused to the principle due to negligence or incompetence (Sukys, 2020, p. 626).

Account for All Property

           The agent must keep the principal’s funds separate from his/her own funds. This also seems like it would be a regular business practice however, because it is specifically written within agent requirements it must be something that has been breached often in agreements in the past. Additionally, any funds or property that the agent receives or disperses on the principal’s behalf through the agency relationship must be held in trust and an accounting must be given to the principal within an adequate amount of time. Commingling is the term used to describe when an agent fails to keep funds separate (Sukys, 2020, p. 626).  

Personal Service and Communication

           Since often agency relationships are agreements for personal services, the agent may not delegate certain duties to someone unless those duties do not require the knowledge, skills, and abilities the agent was hired for in the first place. Therefore, simple tasks or duties are OK. However, the agent is obligated to notify the principal of all facts that would materially affect the subject matter of the relationship due to the assumption by the law that if an agent receives information or attention to, it will also be communicated to the principal. Important to note that due to this fact, the principals rights and liabilities to a third party also known as an individual with whom the agent deals for the principal would be the same had the principal been notified personally so long as the agent is acting within the scope of authority (Sukys, 2020, p. 626).  

           There are many examples of fiduciary relationships that occur in our every day lives. The fiduciary/agency relationship that I personally can think of that I have had is hiring an attorney to get custody of my nephew when my sister passed away. As I was reading through the duties owed to the principal by the agent, there certainly was no breach that took place in my agency relationship. Her services were worth every penny and she always acted in my best interest while carrying out many of the duties described above. One way I can think a breach could have occurred is if she had not been competent enough to understand the case as she had implied and not been prepared in court to ensure that I received custody. In my case, my nephews’ father was unfit to care for his son, my nephew, as he was incarcerated. Because she was so well prepared and knew the law and my circumstances, she quickly requested to vacate my order for guardianship which I had filed prior to hiring her and immediately filed for emergency custody.

           Fiduciary duties are so important, especially when hiring a professional because it is so important that the principal is confident in hiring them and can trust that the agent will carry out the services for which you hired them. Further, equally important is that if the agent breaches their duties, they may be held liable for any loss or injury by the principal. It does not matter what the justification for the breach may be only that a breach occurred. As mentioned in Rotman (2017), “A breach of fiduciary duty is a breach of fiduciary duty, regardless of why it occurred or whether there are subjective reasons for this breach that are alleged to justify it or mitigate its severity. Breaching a fiduciary duty is not a question of degree: it is a binary definition either a breach has occurred or it has not" (Linking Traditional section, para. 25).

  Rotman, L. I. (2017, June). Understanding Fiduciary Duties and Relationship Fiduciarity. McGill Law Journal, 62(4), 975+. Retrieved from https://link-gale-com.proxy.davenport.edu/apps/doc/A529222978/AONE?u=lom_davenportc&sid=AONE&xid=56e690c2

Samet, I. (2008). Guarding the fiduciary’s conscience: A justification of a stringent profit-stripping rule. Oxford Journal of Legal Studies, 28(4), 763-781. doi:10.1093/ojls/gqn029

Sukys, P. (2020). Business law with ucc applications (15th ed.). New York, NY: McGraw-Hill Education.

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How to Trust: Fiduciary Duties Explored

           From my perspective, in today’s world there are so many incentives attached to every facet of business, it is hard to know who to trust, what is really as it’s stated, and where to place your loyalty and money. Trusting a salesperson to sell you what is best for your personal needs and not what is best for their commission is a real concern for today’s shoppers. Expanding that idea, when it comes to finances and things like investing money, seeking advice on real estate transactions, and other impactful decisions needing consultation or advice, it’s hard to know if the recommendations received could also potentially be rooted in that person’s commission percentages, or if it is the honest expert assessment of what is the best decision for the investor. 

           In the interest of having some semblance of loyalty in the economic arena, the law outlined terms under which a responsibility to be loyal could be defined and subsequently enforced. This concept is called “Fiduciary Duties” based on a “Fiduciary Relationship”. “Fiduciary duties are critical to the integrity of a remarkable variety of relationships, including those between trustee and beneficiary, director and corporation, agent and principal, lawyer and client, doctor and patient, parent and child, and guardian and ward” (Miller, 2013). In all of these relationships, the duty to be loyal to the positive outcome of the principal is of the utmost importance. Acting with care, fully disclosing information, and giving the best advice possible are all things for the adviser or agent to keep in mind as they navigate the relationship.

Which brings us back to the beginning point: How can we be sure that advice or decisions made on the principal's behalf are really for the best interest of the principal, and not for some incentive based opportunity of the agent with fiduciary responsibility? The legal system has many times been utilized to sort out where that line of interest is, and each particular case could result in a different line location. There are five duties that are defined by the Committee for the Fiduciary Standard. Here is a summary of each: 

1.     Put the client’s best interest first - loyalty that should not be “compromised by the agent’s incompetence, negligence, deceit, self-dealing, or failure to recognize or resolve a problem in the client’s favor” (

2.     Act with prudence - the advisers necessity to be an expert in the field that they are being consulted regarding. 

3.     Do not mislead - this means sharing complete information, and not falsely or exaggeratedly highlighting something with the intent to influence a decision toward a less desirable action that may not then fulfill duty number one. 

4.     Avoid conflict of interest - at all costs, avoid being in a position where the adviser could have something at stake based on which decision a client makes. 

5.     Fully disclose, and fairly manage, in the client’s favor, any unavoidable conflicts - this really goes back to rules one and four again, as well as rule three - full disclosure and transparency around all potential outcomes and impacts of a decision should be clearly represented to the client (Aiken, 2009).

These rules for fiduciary duty are broad enough to handle application in many different scenarios. There are more specific duties dependent on the exact fiduciary relationship, but for the sake of overview, these are the commonly accepted foundational duties. 

           Personally, there have been several times that I personally was involved in a situation as the client in a fiduciary relationship. Most recently, the purchase of our home two years ago. My husband and I met a realtor at an open house we had dropped into before our house was on the market. We decided to meet with her and have her list our home. She had recommended a price for the home, but knowing the amount of the renovations we had done, and being at the height of a booming housing seller’s market, we went against her advice and listed it for more. Given the short amount of time houses were staying on the market, I was anxious to find my perfect home before it was sold to someone else. I had heard many stories of others being able to put offers in on homes while theirs were not yet sold, and having a contingency of closing upon sale of the buyer’s home. I was shocked and dismayed when my realtor advised that this was not what she felt we should do, and essentially refused to show us homes or take action until we had an offer in our home. While I could see that there was a potential that she could be right, I was emotionally driven to not want to miss the perfect house. 

          Ultimately, it took 45 days for our home to sell, much longer than we had anticipated, and it ended up selling for just what the realtor had initially suggested we list at. So, at this point, she was proven correct. The purchasers of our home were a couple who had actually been renting a home in our neighborhood and who had contacted our realtor directly and ended up choosing her as their realtor as well. Our realtor did disclose this to us, and offered to process the transaction at a 1% discount based on this factor. We ended up going through another offer on a home that had an inspection come back with quite the list of needs, and our realtor was again consulted for her opinion on how we should proceed. By then we realized the value of her opinion, and that she was truly more the expert than we were as we were only utilizing hearsay knowledge and internet articles as our sources. We ended up walking away from the house with the poor inspection report, and did find a lovely home that fit our needs. It was not in my ideal location, but did check all the other desired categories. In summary, I feel that I was skeptical of our realtor’s commitment to her fiduciary duty to us, and that is why we pushed back as much as we did. It is hard to trust people, especially whom you don’t know beyond the context of a business interaction you’ve only just begun. She did everything we could have needed, was fair and honest, and upheld all ethical aspects transparently. Perhaps I’ll never be able to fully shake the preconceived caution that I had, but I certainly do feel bolstered that someone acting as an agent, while perhaps not telling the principal what they want to hear, tells them what they need to hear.

           To date, there is not an instance where I can think of a fiduciary relationship I have been a part of has been breached. I am on my township’s planning commission, and often times we will have people from a homeowner’s association come in to speak on a topic impacting their surrounding area. Often they will quote that they are the liaison representing the fiduciary relationship of their homeowners. This has caused me to wonder if the representation that they are given is solely slanted toward the homeowners benefit. At times, the meetings can feel a bit like a trial, the only trouble being that there is no commitment to speak the truth, opinions stated as fact are not vetted or followed up on. It is important for me in my decision making to ensure that I do not have biases based on the conviction alone of how someone speaks, because everything they may have presented could have been only the perceived or imagined facts. I thoroughly enjoy being a part of local government. It is interesting to be part of the community’s development, and to see the people in our community be passionate about what the future looks like for all of us. I will say that for my position, I do have a duty to make decisions based upon what is good for the greatest number of people and is fiscally and environmentally responsible, so my duty to the community is not fiduciary in the legal sense. Morally, I do feel the compulsion to be loyal to the community voices I have heard, and try to drive the changes that positively impact as many people as possible.

           Thank you for reading my fiduciary duty overview! If you find yourself acting as an agent based on one of the fiduciary relationships I listed, I hope you will be mindful of the five duties and do what is right for your principal!

 Resources

Aiken, B. (July 29, 2009). The Committee for the Fiduciary Standard: Five             Fundamental Fiduciary Principals. Retrieved from          http://www.thefiduciarystandard.org/images/Summary_5Principles.pdf

 Miller, P. (June 2013). Justifying Fiduciary Duties. McGill Law Journal,           Volume58, Issue4, June 2013, p. 969–1023. Retrieved from            https://www.erudit.org/en/journals/mlj/2013-v58-n4-            mlj0866/1019051ar/

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Every Word Matters When it Comes to a Contract

Contracts can be complex, with very explicit and precise instructions describing actions to be (or not to be) carried out in particular ways at particular points in time. It is advisable that anyone entering a contract read and clarify any points of confusion prior to signing said contract. To sign without understanding still attaches ownership of compliance despite any undisclosed questions. 

In the court case Able v. Pontiac, the company Able Construction was tasked with demolishing buildings for the city of Pontiac, Michigan. Able was to obtain a permit the day of the demolition to be signed off on by the city’s director of law  to ensure that the building was cleared for destruction. On eleven separate occasions, Able demolished buildings without getting the requisite form from the law director. The city of Pontiac refused to pay Able for those eleven demolitions, which led to Able suing Pontiac for payment for those demolitions. Pontiac responded by filing a motion for summary disposition in response. The court ruled in favor of Pontiac, citing that Able had clearly defined parameters for how to proceed to be paid properly and did not abide by those parameters.

When Able went forward eleven different times and performed the work without following the process, this was certainly a substantial breach of the contract as the terms were very clearly stated that for each and every occurrence the appropriate written approval would need to be issued. A substantial breach would be considered one in which the breach, “has effected such a change in essential operational elements of the contract that further performance by the other party is thereby rendered ineffective or impossible” (Smiley, A., 2018). In Able’s case, not getting the paperwork completed properly opened up the risk variables for the city of Pontiac, leaving them exposed and unaware. The courts ruled that this was a significant enough violation to be a substantial breach of agreed upon terms. 

I agree with the court’s ruling. The process that Pontiac had set up was to act as a safeguard to ensure that there were no physical harm issues or liabilities that arose with real estate transactions or other new context around each building site. On a personal note, in a commercial real estate recovery transaction that I worked on at a local bank, I arranged the sale of a building so that the city would be able to demolish it as it was becoming unsafe with homeless persons occupancy, and those individuals having fires within the building. If Pontiac was facing a similar situation in any of those eleven buildings, death or injury could have well resulted without the all clear of the status of the building the day that demolition was going to occur. 

For Able, a large company who did comply with at least a portion of the agreed upon process of getting approval day of demolition, there had to be more to their side of the rationale on why they would disregard that portion of the contract. There is always the potential it was sheer negligence, however there is also the potential that a factor like a change in personnel caused a shift in process. Perhaps a newly hired employee did not familiarize themselves with the terms of the contract. Another potential scenario could be that there was other work to be done, causing a time constraint, and someone within Able’s organization to increase efficiency and reduce the amount of time spent filing paperwork, that they just proceed to demolish outside of the terms. Not knowing more on the structure of Able’s company, and just how big it is, a scenario that really does seem to be one that could play out at any organization is that someone new to the situation was unclear on the contract terms. Leaping before looking without realizing the extent of the consequences could very well be the case. 

In Able v. Pontiac, it cites that Michigan law does have a condition precedent ruling that could also apply to this situation, the outcome being the same, that because Able first breached the contract by not following the protocol, that then Pontiac is not breaching the contract to not pay because Able breached the contract first. In another Michigan case, Meagher v. LaFontaine in 2006, a condition precedent was ruled to have not existed due to the word choices outlined in the contract. For Able’s case, were the terms around the need for approval prior to demolition written in a more ambiguous way, or with different phrasing or placement, perhaps there would have been a different outcome for them. 

Overall, a well laid out and easy to understand contract has a good chance of being upheld in court. It does resonate that it is worth the time and energy to meticulously review the phrasing of each component of the contract to ensure that there is not exposure in what you are, or are not, including in each description. 

References

Smiley, A. (June 21, 2018). Contract Law - Substantial Breach Hinges On A Party Receiving Benefit of the Contractual Bargain. Michigan Lawyers Weekly. Retrieved from    https://search-proquest-com.proxy.davenport.edu/docview/2059387779?accountid=40195&pq-origsite=summon

State of Michigan Court of Appeals. (January 31, 2006). Timothy J. Meagher v. Paul A. LaFontaine, Sr. Retrieved from     http://www.michbar.org/file/opinions/appeals/2006/013106/30374.pdf