The United States Securities and Exchange Commission was created to protect citizens in relation to the stock market and other securities. The stock market has a direct effect on the financial stability of our country. In various times in our history, the lack of regulation and oversight has led to stock market crashes which resulted in recessions and the great depression. After the stock market crash in 1929, the people were upset due to the lack of ethics and responsibility put forth by the businessmen working in the exchange. People have a set of morals like a compass guiding them in doing what is right. When a group of people get together in a workplace or organization, they create an ethical framework that the group is expected to comply with. Non-compliance might get you fired or disciplined but usually it is not against the law. That is where the people came in to play and demanded the government enact laws to regulate the business of the stock market. Working in a capitalist society, government is often frowned upon when they situate themselves in business but time and time again, when allowing people in power to make decisions, the outcome is not always ethical or lawful.
In 1933, congress enacted the Securities Act of 1933 which directed public companies to register the sales and distribution of their stock and mandated that companies to disclose their financials. The Securities Act of 1934 formed the securities exchange commission and gave the commission the ability to regulate and oversee brokers, agents and organizations doing business in stock securities. The SEC governs corporate reporting, tender offers, insider trading and stock exchanges. In 2002, 2010 and 2017, other laws were put into place in direct result of financial
instability due to unethical situations that people in business put themselves in which resulted in the public being harmed. The SEC is an important component in regulating businesses and investors and not all the time does it do what it needs to do to protect the interests of United States citizens.
Incidences of ethical violations in the business of securities and stock continues after hundreds of years. Many business leaders are in a position that require high moral and ethical standards. The public relies on them to make lawful and ethical decisions within their business. Often, these leaders make statements either in writing or verbally that lead the public making monetary decisions that could lead to a financial disaster. When business makes false claims that lead to investors making purchases or sales, securities fraud has taken place. An example of this is when Elon Musk tweeted out in August of 2018, that he had backers to make Tesla a private company with shares at $420.00 which was significantly higher than the stock prices were at that time. The problem with this statement was that it was a false statement and that Elon Musk had only briefly spoke to individuals in Saudi Arabia and had nothing concrete and in writing. According to our textbook (Lau, 2014), this would be considered a white-collar crime and specifically would be considered securities fraud. The textbook states that securities fraud is “when someone uses deception to circumvent the regulations or statutes interpreted by the U.S. Securities and Exchange Commission (SEC) to acquire money or property” (Lau, 2014).
Elon Musk recklessly made statements that had his investors, employees and public dazed and confused as to what was happening. Numerous individuals reached out to him to find out the truth of going private and didn’t get a resolution until a week later. NASDAQ also had a field day. NASDAQ must be informed of events such as this before they are released to public in
order to make sure the market stays stable. The stocks initially went up but the days following the price dropped dramatically. Elon Musk came out later stating that the privatization would not happen due to the concerns by the shareholders, employees and investors. The SEC filed a complaint against Elon Musk and Tesla citing violations of Section 10(b) of the Exchange Act and Rule 10b-5 which states that it is unlawful for individuals to make false statements in relation to sales or purchase of securities.
Recently, the SEC settled with Elon Musk and Tesla for 40 million dollars. The $20,000,000 that Elon Musk must pay is less than half percent of his net worth. That is nothing to him. They also stated that Elon Musk could not lead the board of Tesla for three years, but he is still able to be a presence in the company. Elon Musk also must have someone read through any public statements that he makes on twitter, Facebook, blogs and any other media outlet. SEC did this because they felt removing him entirely would be detrimental to the public and investors have already suffered in this process. Elon Musk, even immediately after the settlement, continued to tweet disparities regarding the SEC and how he feels the institution is a joke.
Another executive who felt they were above the law was Martin Shkreli. Martin Shkreli climbed the ladder of financial success fast and had many opportunities come his way to help him become a CEO. While serving as a CEO for Turing Pharmaceuticals, he raised the price of the drug that helps fight a parasitic infection in individuals with a compromised immune system by 5000% (Smythe ; Geiger, 2015). While this was not considered illegal, it is highly immoral and the reasoning behind the increase did not correlate with the reality. Many individuals with high standing had repeatedly pleaded to Mr. Shkreli to reduce the price and at one point said
“lol”. This is just one hint of the man who now has been convicted of securities fraud and will spend the next seven years in prison and will lose around $7.000,000 of his $27,000,000 assets (Merle, 2018). In June of 2018, the United States charged Martin Shkreli with eight indictments. The first three counts were for “defrauding investors and potential investors in MSMB, making a series of misrepresentations to potential investors to induce them to invest in MSMB Capital” (US v. SHKRELI, 2017). For over a year, Mr. Shkreli knew about the loss his company was going through and purposely neglected to inform his shareholders. He also produced fraudulent numbers to make it seem the company was on solid ground. The next three counts had to do with the medical division of MSNB. The charges are similar in that he misled investors and used the investors money unlawfully without their permission. Count seven was levied regarding how he used his third company Retrophin to bail him out of the financial crisis he was incurring from MSMB. He told investors in MSMB that he was closing those companies and they would have the opportunity to receive stocks from Retrophin or cash. The problem with this is that there were not enough assets to cover this payout as well as Martin Shkreli never received approval from Retrophin’s board. Martin Shkreli also tried to control shares of company Fearnow by having seven of his employees buy shares under the 5% threshold given by the securities and exchange commission (US v. SHKRELI, 2017).
The judge in this case stated in court that “White collar offenders like Mr. Shkreli use their intelligence and acumen to elude detection” (Merle, 2018). Fortunately, this particular judge felt it was her duty to set an example of Mr. Shkreli and made a point to stress this in her ruling. Mr. Shkreli knew absolutely what he was doing and over a period of five years was involved in several shady transactions that were immoral, unethical and unlawful. He received
seven years and a loss of $7,000,000 but what is not highlighted in most of these articles is that his attorney, Evan Greebel, was disbarred, received an 18-month sentence and will have to pay close to $11,000,000 in restitution (Saul, 2018). According to court documents, Mr. Shkreli’s net worth at the time was $27,000,000. After fines and restitution are paid, he will still have millions to invest while in jail for him to live comfortably when he gets out. His ex-lawyer will have nothing when he comes out. Greebel at time of sentencing was worth around $1,000,000 (Simmons, 2018). Of course, Greebel knew very well what he was doing but it was Martin Shkreli that was behind everything and without his direction Greebel most likely would have not done what he was arrested for.
Elizabeth Holmes was CEO of Theranos, a private health testing company, from 2003 to 2018. She founded the company at only 19 years old. The major selling point to investors with this company was the supposed technology that could test very small amounts of blood for various medical conditions. The technology, called Edison, was boasted be the evolution of testing blood for illnesses and even had Walgreens on board making a deal to have on cite blood testing in its stores. Due to reporting by a Washington Post reporter, it was discovered that the company was using the previous used antiquated machines to test blood samples and the Edison technology, when used, could not do what is was stated it could do. What is so immoral regarding this is that Elizabeth Holmes was fully aware of the lack of accurate results in the testing but continued to spread false statements for her to maintain her company and her wealth. People were either misdiagnosed or not diagnosed at all which could have led to increase illness and/or death. The SEC ended up settling with her in March of 2018 for $500,000 and the
agreement that she would not hold an officer or director position in any company for ten years. She will not serve any jail time. At the time of the settlement, she was estimated to be worth zero dollars but I still feel that know jail time is unacceptable.