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Risk Management
Non-Financial Risk

Minimising Conduct Failure and Managing Human Risk in the Organisation

Posted by on 31 January 2019
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“It is one of the biggest mysteries on Wall Street: Who is Tipper X, the secret witness at the center of the biggest insider-trading case in a generation? The answer is Thomas Hardin — a young investment analyst who, the authorities claim, traded on inside information and may now lead prosecutors to other crucial players…”
– New York Times, January 12, 2010

In 2007, while working at a small hedge fund in NYC as a 29-year-old technology stock analyst, I received illegal inside information from another investor on four occasions: three tips regarding upcoming corporate M&A deals and one tip with information about a company’s quarterly earnings announcement. Based on the behaviour I was observing in the industry at the time, I talked myself into placing the trades. “Who am I hurting?”, “everyone is doing it,” “I’m still a good person” - the all too common excuses for unethical (or illegal) behavior. Ultimately, my faulty rationalisations led to a career ending, life-altering situation. In July 2008, I was approached by FBI agents on the street outside my apartment in Manhattan and presented the opportunity to help the U.S. government build larger cases. I became known as “Tipper X” and was credited with assisting the FBI in over 20 of the 80+ cases in Operation Perfect Hedge, a Wall Street house cleaning campaign that morphed into the largest insider trading investigation of a generation.

Having no plans to ever speak about my experience (who would want to talk about the worst thing they ever did to an audience?), I was asked by the FBI in 2016 to speak to their rookie agent class about my case, and from there I have made it my life’s mission to assist risk and compliance officers in the training of staff. More than just “scaring them straight,” my goal is to educate on exactly what I was thinking as a young professional, by exposing the extremely faulty rationalisations I made and then showing how risk, surveillance and compliance professionals can keep their employees from suffering the same fate. From my own experience and through now 150 speaking and client consultations over the past two years, below are some areas for firms to consider with regard to minimising conduct  failure and better managing human risk in the organisation:

1) Isolated decision making

When I received illegal inside information, I went through a poor series of rationalisations to justify the trades. The bigger picture takeaway here is that I engaged in “isolated decision making” and when I think about my behavior, and study the crimes of others in similar situations, one of the common threads to weave together is the idea of an individual making a decision, or several decisions, in isolation. I did not talk to anyone else at my firm before placing the trades. Firms today need to think about their exposure in the organisation to individuals who may be more prone to this type of decision making.

2) Thinly-supervised employees in remote offices

As I look at other individuals charged in the larger era of cases known as Operation Perfect Hedge and in my corporate talks today, another major takeaway to think about with regard to conduct risk are thinly-supervised employees who may be operating out of remote offices. In my presentations to firms with global office footprints, I sometimes find the line of questioning during my talks from younger professionals to be as to how close they can get to the line. I think extra education for younger professionals here is extremely important!

3) Importance of professional mentorship

In my 20s, I did not have a professional mentor. Had I spoken to anyone outside of my firm and explained what I saw occurring in the industry, the right person would have certainly guided me in the right direction. It’s important for companies today to maintain either formal or informal mentorship programs for younger professionals.

4) Tone at the top vs. mood in the middle

Regulators worldwide, rightly so, are focused on tone at the top. However, I would argue from my experience that it’s the “mood in the middle” that drives misconduct. Does what is said at the top in annual chairman letters and board meetings trickle down to how middle managers conduct day to day business and set goals and incentives?

5) “The cover up is worse than the crime”

It is vitally important to create a culture where people are not just comfortable raising issues but expected to raise issues. I feel the industry still has more work to do in this area.

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