We Need a Hero: Searching for Justice Among Financial Market Superpredators

"Our regulatory system has not kept pace with the markets and the needs of investors." -- SEC chief Mary L. Schapiro, January 2009[1]

On May 17, 1792, under a buttonwood tree located at today's 68 Wall Street, 24 traders entered into the "Buttonwood Agreement," agreeing only to deal with each other and setting commission at 0.25 percent. Thus, the New York Stock Exchange was born. "In the early years of the market, it was apparent that auctioneers were rigging prices to suit themselves rather than provide fair prices for investors," writes Charles R. Geisst in his book Wall Street: A History. "The new market would be more structured, conducted without the manipulative auctions."[2]

ROGUE TRADERS: LIKE BAD PENNIES, THEY ALWAYS TURN UP

Over two centuries later, the world market capitalization has swelled to a mind-boggling USD 50 trillion, but the quest for fairness seems no closer to achieving its goal. Rogue traders are never far from the headlines. On Sunday, Swiss financial giant UBS reported a USD 2.3 billion loss from the unauthorized trading of alleged "rogue trader" Kweku Adoboli, who was arrested in London last week.

"The positions taken were within the normal business flow of a large global equity trading house as part of a properly hedged portfolio," said UBS in a statement that revealed how Adoboli was able to achieve such a massive level of fraud. "However, the true magnitude of the risk exposure was distorted because the positions had been offset in our systems with fictitious, forward-settling, cash ETF positions, allegedly executed by the trader. These fictitious trades concealed the fact that the index futures trades violated UBS's risk limits."[3]

And while rogue traders using complex and opaque financial instruments and system-gaming techniques always seem to be one step ahead of regulators -- and "socially responsible investing" as a catch-phrase and modern investment strategy is still in its nascent stages -- the idea that investors should act responsibly for the common good is an ancient one.

CORRUPTION: AS OLD AS THE HILLS

In his keynote address for the 2006 World Business Ethics Forum in Hong Kong, Alex C. Michalos, the director of the Institute of Social Research and Evaluation (ISRE) at the University of Northern British Columbia, said that although Aristotle did not outline his philosophy of business ethics, it is clear that the ultimate aim of business ethics is serving people in the highest good.[4]

Michalos said that crooked businesspeople "were such familiar figures in the daily lives of the ancients" that "philosophers, poets, dramatists...could safely invoke the images of such people knowing that their listeners or readers would get the point."[5]

But it the private sector wasn't all bad apples. Historically, mercantilism was viewed as a force of good. Corruption was the aberration. "From around 600 BC," notes Indian corporate affairs minister Murli Deora, "the merchant was considered an asset to society and was treated with respect and civility as is recorded in the Mahabharata and the Arthashastra," a Sanskrit war epic and an Indian economic treatise, respectively.[6]

WE, THE UNDERSIGNED: SAYING IS NOT DOING

Today, documents, statements, agreements and principles are being drawn up by governments, NGOs, investor groups and a whole host of multilateral organizations to establish, codify, enact and inculcate the ideals of socially responsible investing.

The Principles for Responsible Investment (PRI), an investor initiative in partnership with the United Nations Environment Programme Finance Initiative (UNEP FI) and the UN Global Compact, for example, opens with a simple statement: "As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries."[7] Considering this sentiment against today's unending flow of international financial fraud and widespread market distrust, it sounds quaint and a bit worn, like a line of country wisdom that has been so overused that it has lost its meaning.

CALLING FOR A SECURITIES SUPERCOP

In April 2009, just months after the S&P 500 plunged more than 18 percent, posting its worst-ever fiscal year start[8], William Kurt Black, a professor of economics and law at the University of Missouri-Kansas City and financial fraud expert, in a presentation at the 18th Annual Minsky Conference on the State of the U.S. and World Economies at the Levy Economics Institute, a nonpartisan nonprofit think tank at Bard College in Annandale-on-Hudson, New York, proposed the creation of a "chief criminologist" position at the US agency responsible for enforcing federal security law, the Securities & Exchange Commission (SEC).

He noted that while the SEC was a law enforcement agency, "criminologists have no role" in an arena where "lawyers and economist dominate," adding that "there are economic theories that are useful to understand fraud, but economists interpret these theories to exclude fraud, therefore we blunder from crisis to crisis [and] things get worse."[9] At her 2009 confirmation hearing before the Senate banking committee, SEC head Mary L. Schapiro, a lawyer by trade who has worked at the SEC for over two decades, said, "There are many reasons for this crisis — and one of them is that our regulatory system has not kept pace with the markets and the needs of investors."[10]

Black makes the case that economic analyses of financial market breakdown due to fraud don't get what criminologists do: crime causes social dysfunction. In the case of the illegal causes of market dysfunctionality, white-collar criminologists should be the go-to people, he says, not economists. Black refers to the criminals behind so-called "control frauds" (e.g., Enron, Madoff, S&L crisis), as "superpredators" who cause "greater losses that all other forms of property crime combined." Perhaps we do need a "securities supercop" outside of traditional agencies like the SEC and FBI. Because while the famous buttonwood tree on Wall Street is long gone, the "manipulative auctions" that plagued the market built around that tree in the late 18th century are not.

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