Last week, the Swiss banking regulator announced it had punished a local bank chief for insider trading using privileged information obtained at work. Finma said it is confiscating 730,000 francs ($752,000) in ill-gotten gains and banned the executive from managing a bank for four years.
Insider trading cases of this nature are reasonably common. The US Securities and Exchange Commission took action in at least three this month. But the Swiss case captured attention because Finma scrupulously refused to name the person involved or even the bank.
Swiss officials argue that banning the man — the press release used male pronouns — more than fulfils Finma’s mandate to maintain orderly markets. “We don’t need to destroy his life,” one says.
The Swiss reluctance to name and shame stands in stark contrast to an American action against John Stumpf that came the day before. The Office of the Comptroller of the Currency said that the former Wells Fargo chief executive would pay $17.5m to settle a probe of his role in the fake accounts scandal that continues to weigh on the bank. He is also being banned from working in banks.
The Wells action comes even though Mr Stumpf was never personally linked to the scandal that saw employees open millions of bank and credit card accounts that customers did not authorise between 2002 and 2016. The OCC alleged that Mr Stumpf “failed to respond to numerous warning signs” and accepted assurances from his underlings that complaints about sales practices were isolated problems.
Some defence lawyers argue that it is draconian to punish Mr Stumpf simply for failing to ask enough questions. They worry that the settlement could frighten good people away from serving as top executives.
To the rest of us, it seems obvious that holding CEOs personally accountable sets an example that might make other executives think twice about presiding over widespread misbehaviour. To that end, the US has been steadily ratcheting up prison sentences for white collar crime for decades.
Yet actual criminal cases against top executives have remained few and far between. With the notable exception of the Icelandic banks, no bank chief executive served jail time for the 2008 financial crisis. “It’s extremely difficult to make a case against the senior executives because they don’t get involved in operational issues. But they can put extreme pressure on the lower echelons to cut costs or hit targets,” says John Coffee, a Columbia law professor.
That begs the question of whether there is a better way. The US has experimented with astronomical corporate fines. Regulators argue that fines hit executives — whose bonuses are often tied to earnings and share price — and provide incentives for boards and investors to provide more vigilant oversight.
But critics such as former Securities and Exchange Commissioner Paul Atkins argue that such fines effectively hurt investors twice. There are other reasons to doubt their effectiveness. Multiple pharmaceutical groups including Pfizer and AstraZeneca are repeat offenders, and Purdue Pharma continued to market opioid pain killers aggressively despite a $600m fine in 2007.
A study commissioned by Prof Coffee casts further doubt on the basic effectiveness of supersized penalties. It looked at the 25 largest US corporate settlements and found that share prices went up rather than down both on the day and 25 days after the penalties were announced. That may reflect relief that the investigations were over and fines were no worse, but it’s hard to see how a share price rise provides deterrence.
Whatever their effectiveness, large fines are falling out of fashion under US President Donald Trump. In the first two years of his administration, the Department of Justice levied $20.6bn in corporate penalties — 80 per cent less than the $101.2bn in the last two years under Barack Obama, according to consumer group Public Citizen.
Which brings us back to finding effective ways to punish individuals. The Stumpf penalties for failing to act offer one solution, but there are other ways to make it easier to hold top executives responsible. After Enron collapsed, the US began requiring CEOs and chief financial officers to certify personally that company accounts were accurate. The UK’s senior managers and certification regime, created after the 2008 crisis, also requires personal signoffs.
These cases are also spreading outside the financial realm. In France, former Orange CEO Didier Lombard was sentenced to jail in December for heading up a restructuring linked to employee suicides. In the US, John Kapoor, former chief executive of drugmaker Insys, will spend five and a half years in prison for a scheme to bribe doctors to prescribe the company’s opioid spray. And Brazilian prosecutors last week filed homicide charges against former Vale chief executive Fabio Schvartsman over last year’s deadly mining disaster.
Such cases remain hard to bring and harder to win: criminal charges against former Volkswagen chief Martin Winterkorn over its 2014 emissions cheating scandal have yet to come to trial.
But we have to try. The worst kind of deterrence is none at all.