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Critical Thinking

What Makes Rich and Powerful Executives Commit Fraud?

Critical ThinkingFOXBusiness

Hedge fund manager Raj Rajaratnam had it all. By some accounts, the co-founder of Galleon Group was a billionaire. Now he’s serving an 11-year prison term for running what may have been the biggest insider trading scheme in history.

That scandal brought down a who’s who of rich and powerful executives: former McKinsey managing director and Goldman Sachs director Raj Gupta, top IBM executive Bob Moffat, former AMD CEO and Globalfoundries chairman Hector Ruiz, and Intel Capital managing director Rajiv Goel, to name a few.

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I read recently that KPMG executive Scott London pleaded guilty to criminal securities fraud and faces 20 years in prison. The guy risked everything to feed inside information on public companies like Herbalife and Skechers to a friend.

And for what? By all accounts, less than $100,000 in cash and jewelry. Peanuts for a senior partner in a Big Four accounting firm.

The big question is why? Why do they do it? What motivates rich and powerful executives who have it made to risk it all?

You might think they’re evil men. Personally, I don’t think so. I knew Rajaratnam back in the day. He was a research analyst and then president of investment bank Needham & Company. I’m generally a pretty good judge of character and I thought he was a pretty nice guy.

Of course, wealth and power can change you, but I’m pretty sure the guy wasn’t evil, however you define it.

Maybe they’re stupid. Maybe, but I seriously doubt it. It takes smarts to reach such lofty heights in the business world. I’m pretty sure all these men knew what they were doing, knew what the risks were. I’m certain they could do the math. And they did it anyway. Their actions may have been stupid, but they themselves were not.

A common answer for this sort of thing is greed, yet that doesn’t even make the slightest bit of sense here. After all, these people risked far more wealth than they stood to gain by their fraudulent or criminal actions. And some of them didn’t even profit from their leaks. They didn’t make a penny.

Here’s a possibility. Maybe it’s arrogance. Perhaps all that power goes to their heads and makes them feel invincible, above the law. Indeed, former ImClone Systems CEO Sam Waksal described himself that way after pleading guilty to securities fraud, obstruction of justice, and other insider trading-related charges.

I bet he lost some of that arrogance in federal prison.

Okay, enough with the guessing games. I’ll let you in on a few secrets.

While things have changed in recent years, it wasn’t that long ago when insider trading rules were so unclear that even the regulators weren’t sure who to go after. As a result, they were erratically, selectively, and rarely enforced.

Until the SEC adopted Fair Disclosure Regulation FD in 2000, public companies routinely briefed individual Wall Street analysts on all sorts of confidential information like how the quarter was shaping up and strategic deals in the works. And those analysts wrote reports that went out to all their investors. Almost anyone could get their hands on them.

And, until last year, members of Congress could legally trade on inside information.

So, there was indeed a time when insider trading was more or less institutionalized – as long as you were “leaking” confidential information to a Wall Street bank or a member of a Congressional committee. But it didn’t stop there. Back in the day, it was relatively common. Maybe it still is.

That said, I simply couldn’t, with a clear conscience, lay this all at the feet of government regulators and their corrupt relationships with bankers and politicians.

The truth is that some people do crave power, and being in a position to enrich others makes them feel powerful indeed. It makes them feel important, strong, like real big shots.

Observing that from the outside, we interpret it as arrogance, greed, hubris, an oversized ego. Which is ironic because, in reality, those people feel very small inside. They need almost constant reaffirmation of their power and position to fill an empty void. It’s sad, really.

What isn’t sad, however, is that dysfunctional behavior is one of the most common reasons why executives and business leaders fail. At the heart of every failing company you’ll find executives that aren’t as competent as they need to be, are more complacent than they should be, or are more dysfunctional than they can get away with.

Those executives don’t just self-destruct. They take their employees, shareholders, and customers down with them. That isn’t sad. It’s tragic. 

What do you think?

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