Question

42-10. AQUESTION OF ETHICSBetween 1970 and 1981, Sanford Weill served as the chief executive officer (CEO) of Shearson Loeb Rhodes and several of its predecessor entities (collectively “Shearson”). In 1981, Weill sold his controlling interest in Shearson to the American Express Co., and between 1981 and 1985, he served as president of that firm. In 1985, Weill developed an interest in becoming CEO for BankAmerica and secured a commitment from Shearson to invest $1 billion in BankAmerica if he was successful in his negotiations with that firm. In early 1986, Weill met with BankAmerica directors several times, but these contacts were not disclosed publicly until February 20, 1986, when BankAmerica announced that Weill had sought to become its CEO but that BankAmerica was not interested in his offer. The day after the announcement, BankAmerica stock traded at prices higher than the prices at which it had traded during the five weeks preceding the announcement. Weill had discussed his efforts to become CEO of BankAmerica with his wife, who had discussed the information with her psychiatrist, Dr. Willis, prior to BankAmerica’s public announcement of February 20. She had also told Dr. Willis about Shearson’s decision to invest in BankAmerica if Weill succeeded in becoming its CEO. Willis disclosed to his broker this material, confidential information and purchased BankAmerica common stock. After BankAmerica’s public announcement and the subsequent increase in the price of its stock, Willis sold his shares and realized a profit of approximately $27,500. The court held that Willis was liable for insider trading under the misappropriation theory. [United States v. Willis, 737 F.Supp. 269 (S.D.N.Y. 1990)]1. The court stated in its opinion in this case that “[i]t is difficult to imagine a relationship that requires a higher degree of trust and confidence than the traditional relationship of physician and patient.” It then quoted the concluding words of the Hippocratic oath: “Whatsoever things I see or hear concerning the life of men, in my attendance on the sick or even apart therefrom, which ought not be noised abroad, I will keep silence thereon, counting such things to be as sacred secrets.” The court held that Willis had violated his fiduciary duty to Mrs. Weill, his patient, by investing in BankAmerica stock. Do you agree that Willis’s private investments, which were based on information learned through his sessions with Mrs. Weill, constituted a violation of his duty to his patient? After all, Willis had not “noised abroad” Mrs. Weill’s secrets—that is, he had not told others (except for his stockbroker) about the information. If you had been in Willis’s shoes, would you have felt ethically restrained from trading on the information?2. Can you think of any ways in which Willis’s trading could have been harmful to Mrs. Weill’s interests? Does your answer to this question have a bearing on how you answered Question 1?3. Do you think that the misappropriation theory of liability imposes too great a burden on outsiders, such as Willis? Why or why not? How might you justify, from an ethical point of view, the application of the misappropriation theory to “outsider trading”?

Answer 1

Answer 1- Outside trading includes any activity that results in the beneficial investment in any financial source on the basis of the information that s not provided to the common public. As Dr. Wills used the received information to invest in the BankAmerica, it constitutes the case of outside trading even though he did not communicate this information to anyone else but he used it for self-interest

Yes, the use of the information for the personal use is the violation of ethical duty towards the patient as she told the information trusting that this information will not be used for any personal or other sort fo benefits

I would have definitely had some ethical restrains as the decision of investing in BankAmerica was based on misuse of the trust of the client

Answer 2= Mrs.Weill's interest might have negatively affected if Dr. Wills had informed the other individuals about this interaction and others had also involved in the outside trading. This could lead to the unfair trade practice and if this information reaches to the authority and other stakeholders, it may have serious consequences for Mrs.Weill

Answer 3= No, this theory is suitable so that the interests of the common public can be safeguarded and no unfair advantages can be taken from the information which is not publically available and is not intended to be used by the person.

Ethically to, it is not good to use the entrusted information of someone for personal gains. This results in the unfair playfield and it is a sort of cheating with rest of the other investors.