Blame Practice on a Desire for Fast Payoff and Revenge

Greed is certainly an element in the Boesky-Levine, or any other, insider trading scandal. After all, people don’t make stock market transactions based on confidential information just for the fun of it. The potential profits are enormous.

However, two other factors are equally important. They slowly become apparent as one interviews a wide variety of what should be called “amateur inside traders,” people who do this only occasionally (perhaps once in a lifetime), as opposed to “professional inside traders” like Boesky, who do it for a living.

For more than two decades I have conducted semi-annual surveys of managers for major corporations. Questions about career plans, compensation expectations and investment activities have topped the list. My staff and I also have followed the career paths of more than 6,000 managers to see how each year’s reality matched their prior year’s hopes.

In the last seven years, 238 managers in this combined sample admitted making an inside transaction or being party to one, usually in the name of a relative or friend to whom they had passed the information. That’s 238 out of more than 34,000, so the percentage--well under 1%--isn’t large.

It wasn’t easy at first to get beyond the glib rationalizations offered by most of the 238, such as: “There’s nothing new about playing a hot tip, even if it’s about your own company,” and, “Using inside information to buy or sell stocks isn’t illegal in Europe, you know.”

Nevertheless, the underlying factors eventually emerged. The first has to do with instant gratification.

While critics of today’s workers may see them as more self-indulgent and narcissistic than those of, say, 30 years ago, a closer look indicates that the reverse is probably so. In fields ranging from medicine to management the number of truly dedicated professionals in the U.S. labor force has grown substantially since the 1950s.

Gradually throughout the 1960s, millions of Americans found their work consuming them. By the 1970s, it had long ceased to occupy just the hours 9 to 5 on weekdays, after which it was followed by a commute to the suburbs and a, “Hi, honey, I’m home.” Instead, work had slowly expanded its place in their lives and occupied them from 8 a.m. to 6 p.m., or even later each day, with many weekend hours thrown in and barely noticed. Staying current and competent demanded nothing less. The Ozzie and Harriet era was over.

The expanding work involvement of millions was a consequence of the shift from manufacturing to services. Hourly wages were superseded by annual salaries, and the concept of a job was replaced in most people’s minds by that of a career.

This helped weaken the link between effort and financial reward, a real plus in some ways since it allows people to concentrate more on their work and less on the money. In fact, the typical customer of a white-collar professional doesn’t want the person dispensing the service even to be thinking about the bill, but rather to do the best job possible.

So much for the good news. One powerful force pulling in the opposite direction has to do with instant payoffs; people still want them.

They may now inhabit a work world that asks them to focus on the longer term, but it is human nature to want something short term too, at least once in a while. Where will they find it? One place is the state lottery, another is the casinos in Las Vegas, a third is the friendly neighborhood bookie--betting on the Raiders or the Giants. But many people prefer the stock market. That is especially so if they can stack the odds in their favor, something they can’t do with their other gambles but can in the stock market using inside information.

Sooner or later they’ll get some inside information, and then they’ll have a serious choice to make: cash in or forget it.

Most, of course, choose the latter, but in recent years a growing number have tried to cash in. In fact, 186 of the 238--about 78%--have made such a trade only within the last 30 months.

Profits Hard to Pass Up

The sizable profits are hard to pass up, a point these managers themselves make, but they also want the thrill that comes from “hitting the jackpot.”

They don’t see their work as providing this possibility, and as established professionals, they feel there is something wrong with even wanting it. But want it they do: The speed of the payoff is every bit as satisfying to them as the size.

That motivation alone, however, might not be enough to lead many executives into illicit stock trading. Another factor, and in my opinion the most important one, is a desire for revenge.

Even if a particular manager always had larceny in his heart, there once was little opportunity to exploit inside information. The moves in the price of a company’s stock in response to its news releases typically were too small to enable someone to get rich.

However, in the past four years there has been a record wave of mergers and acquisitions, sometimes involving companies so large they were previously considered unswallowable.

That created a widespread opportunity for people to become wealthy overnight by using inside information on deals that would swing the price of a stock.

Who would risk throwing away a career to profit this way? It is crucial to step back for a moment and realize that this exciting wave of financial activity was accompanied by an equally large wave of human discomfort. Managers were fired by the thousands; every merger that made an ordinary investor wealthy made an executive at the acquired company unemployed. Sometimes they were the same person.

In short, intense merger activity produced both the gasoline and the match; it created the opportunity for instant riches and, simultaneously, made a large number of people highly motivated to use, or misuse, any inside information they possessed before they, too, possibly were dismissed.