Insider trading at Apple: Objectivity under Cloud

Last week Apple's former lawyer, Gene Levoff, was accused of insider trading by the Securities and Exchange Commission (SEC). Ironically, Levoff was the company's lawyer responsible for overseeing insider trading policies. He was in charge of communicating to everyone in the company the policies to be followed to avoid any insider trading, comply with all the regulatory requirements inside the company and as required by the external agencies.

According to the suit filed, he continued with insider trading from 2011 to 2016, a long period of five years.

The brazen show of utmost disregard to the corporate governance norms in a cash-rich company like Apple has undoubtedly raised the issue of top leadership and the efficacy of checks and balances.

It is noteworthy that this has happened in the United States, a jurisdiction known to be very tough on inside trading and corporate misfeasance. Several cases, including that of Rajat Gupta in Goldman Sachs, have been the talk of the town in the last decade or so. Prosecutors have been after violators of corporate governance norms using digital trails, phone tapping, and circumstantial evidence in general.

Corporate entities have a tremendous responsibility, shouldered by the top management, to work for the interest of shareholders, without giving any opportunity to the top personnel to feather their own nests. This is, however, extremely difficult to be made fully objective, as the individuals manning the top management positions to get to know many confidential details about the company much before all that is made public. The lure of lucre – and, the higher the gains, the higher the chances of inside information being misused – is often too much to be resisted by the insiders, however, the objective norms to be compiled in mature jurisdictions like the United States are usually effective in acting as deterrent for someone not to slip, or at least catch hold of the person within a short period of time.

At least on two occasions, Levoff made huge sums of money or avoided suffering huge losses by using the information he was privy to in an illegal and unethical manner.

Did the top management in the company know about it? There is a high-level of possibility that some members, if not all, in the top management knew about Levoff's adventurism and chose to turn a blind eye. Did they also benefit from either remaining silent or being an active, or passive, partner in the deals? It is rather unconvincing that there was no check on Levoff by the company in any manner and he was absolutely free to do as he wished. Levoff was reporting to the General Counsel of the company, who is responsible for the overall supervision of the legal team, compliance to all the statutory and regulatory requirements, and aligning company's business strategy with the legal strategy, keeping in mind the legal environment of any particular jurisdiction. More than two dozen lawyers and paralegals used to report to Levoff. Is it possible that no one knew about his actions? The subordinates reporting to him, for obvious reasons, would not have opened their mouths, but what about the general counsel and other members of the top management? Did they not know anything? Most unlikely!

The success of the fast emerging fine-tuned corporate governance norms depends on the collective responsibility of the top management. Objectivity cannot be set as a standard in the absence of adherence to the finest and highest principles of ethics and propriety in the execution of the smallest of the tasks. Eliminating subjectivity is a challenge, but individuals in higher positions of power with immense discretionary power are expected by law and reason to be judged objectively.

How to ensure it?

Any number of measures to make the system foolproof, anywhere in the world, has not been fully successful. Thus, there is always the risk of making the error of judgment and thus letting the life go on, whether of a company or an individual. The only saving grace is that the anomalous behaviour gets detected at the earliest and corrective measures taken within a reasonable period of time. Absent such effectual measures the corporate governance systems go to the dogs.

The author is a professor at IIM-A, akagarwal@iima.ac.in