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Does the Law Encourage Unethical Conduct in the Securities Industry?


Vincent DiLorenzo


St. John's University - School of Law

September 2005

St. John's Legal Studies Research Paper No. 09-0025

Abstract:     
This article explores business conduct in the securities industry in light of behavioral tendencies uncovered by researchers in the fields of psychology and organizational behavior. The thesis is that the nature of legal regimes imposed in the securities industry encourage rather than discourage unethical decisions. The American Law Institute's Principles of Corporate Governance require a corporation to comply with legal mandates regardless of the adverse effects compliance may have on profits. Moreover, the comments to the Principles of Corporate Governance make it clear that corporations must not only seek technical compliance with the law but should base their decisions on the goal of serving the policies and purposes behind the particular legal mandate. Legal conduct is thus differentiated from ethical conduct with the latter encompassing the commitment to a law's underlying purpose.

Yet the securities industry's actual conduct has not reflected such a commitment. Instead legal mandates are evaded and, at times, ignored. This paper begins with an examination of recent examples of such unethical conduct, including a discussion of possibly fraudulent conduct on the part of industry securities analysts. It then explores why such conduct is deemed to be reasonable under the legal regime faced by the industry. First securities law mandates are vague. Such vagueness leads to the behavioral tendency of denial - denial that a violation has occurred and denial of responsibility for possible adverse effects (e.g. losses suffered by investors). It also leads to the tendency to invoke cost-benefit evaluations in deciding on a course of conduct. However, for many profitable ventures cost-benefit evaluations do not favor commitment to the law's purpose, i.e. do not favor commitment to ethical conduct. Second, courts have imposed numerous prerequisites to the imposition of any sanction, e.g. proof of scienter and causation, that are very difficult and at times nearly impossible to satisfy. This leads to a tendency toward technical compliance with and even evasion of the law's mandate. Corporate behavioral tendencies are explored by examining industry practices and reactions to accusations of wrongdoing.

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Date posted: September 7, 2005  

Suggested Citation

DiLorenzo, Vincent, Does the Law Encourage Unethical Conduct in the Securities Industry? (September 2005). St. John's Legal Studies Research Paper No. 09-0025. Available at SSRN: http://ssrn.com/abstract=796067 or http://dx.doi.org/10.2139/ssrn.796067

Contact Information

Vincent DiLorenzo (Contact Author)
St. John's University - School of Law ( email )
8000 Utopia Parkway
Jamaica, NY 11439
United States
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