Synopsis:
Paul, a junior salesperson, works on the trading floor for FirstAmerica Bank. Paul was hired by Linda who is an aggressive and successful senior salesperson. Her client, Poseidon, is a cruise line that needs assistance with FX hedging strategy for the construction of its new ship in France. Poseidon’s management team is fairly unsophisticated and needs quite a bit of guidance from Linda. As such, Linda has developed a strong relationship with the company and has earned the management team’s trust.
Linda overstated the pricing to the client and has lied about the overall profitability of the hedging strategy. After the client becomes suspicious about the deal and asks for rate sheet confirmation, Linda can only produce falsified pricing that includes French withholding tax rates, which lead the client to believe that rates are higher.
Upon discovering the misleading information, Paul lets Lisa know that the rate sheet is incorrect and should be revised. At this point, Lisa has directed Paul to send a fax that intentionally misleads the client with false information.
Framework:
When confronted with an ethical dilemma, it is important to develop a system or a framework that can be leveraged during the evaluation process. First, one should recognize the issue and understand the facts. Once the facts are known, one can evaluate the different stakeholders, determine options and consider alternative scenarios. Since ethical dilemmas often have unclear solutions, it may be prudent to back test a decision and evaluate the consequences. After a decision is made, one should reflect on the experience and utilize the assessment as an opportunity to grow and improve.
Stakeholders:
I. Protagonist (for brevity, the protagonist will be known as “Paul”) – Junior salesperson.
II. Linda – Senior salesperson.
III. Peter – Derivative Sales Manager.
IV. Senior Vice President – Manages entire trading floor team.
V. FirstAmerica Bank shareholders.
VI. Poseidon Cruise Lines (“Poseidon”) – Client is building a ship and needs to hedge its FX exposure via a cross currency swap.
Dilemmas
Paul is conflicted about sending a misleading fax to Poseidon vs. disobeying his senior manager who strongly vouched for him during the hiring process.
Options:
I. Send the fax:
a. If Paul sends the fax, he will be committing fraud by willingly deceiving his client. He is not acting in the best interest of Poseidon and runs the risk of termination if he is caught. Alternatively, what if nobody finds out about the price gauging? Paul and Linda would likely be praised for landing such a large deal. However, it is possible that the deal is so large that it will attract increased attention, which in turn, may attract increased management scrutiny.
II. Do not send the fax:
a. Paul’s moral compass tells him that sending the fax will be wrong, evidenced by his thoughts of “I feel that basic honesty in human interactions is a crucial building block for an enjoyable and happy world.” Paul should back away and think twice about the consequence and impact of his actions. In addition, I don’t think pawning the responsibility off to Linda is appropriate. By turning a blind eye, Paul is complicit and has not changed the outcome of Linda’s unethical behavior.
III. Discuss with Linda:
a. Paul can try to confront Linda and discuss the misleading pricing information. However, given Linda’s demeanor and her deliberate obfuscation of the facts, Paul will unlikely make any progress in changing the outcome.
IV. Escalate the issue:
a. As a junior member on the trading desk, Paul does not likely have sufficient equity built up to convince Linda that she is in the wrong. As such, Paul will need to escalate his dilemma to Peter—the senior sales manager on the derivative trading desk. Peter is an ineffective manager, and given his lack of understanding and sophistication, alerting him will likely be fruitless. Regardless, Paul should make an effort to let Peter know and document Linda’s transgressions.
b. Since alerting Peter will not likely change the outcome, Paul will most likely need to escalate the issue to the senior vice president. While this step is a bit intimidating and difficult for Paul to rationalize, it will be the most effective option in remediating the ethical issue. Paul will be able to document Linda’s behavior, Peter’s ineffective management, and shine a light on the company’s lack of safeguards.
c. If Paul escalates the issue to the senior vice president, Linda can be immediately reprimanded or terminated for her behavior. While the senior vice president can step in and put a stop to Linda’s behavior, much larger questions loom: What safeguards are in place to protect the bank? Is there an issue with the incentive and compensation structure? And finally, how can the bank improve its culture?
V. Seek alternative employment
a. If all else fails, Paul will need to consider employment elsewhere. If Paul gets tangled up in Linda’s fraudulent practices, he may be criminally prosecuted and his financial career will be over if he is ever caught. If Linda misleads Poseidon and Peter and the senior vice president are complicit, Paul could be setting himself for a disastrous scenario in which he becomes the fall guy. Paul should remove himself from the situation, leverage his experience, and try to move to another swap desk.
Advice from Mill:
Utilitarianism is one of the most common frameworks for evaluating difficult ethical decisions, as it instructs the individual to consider the amount of good and bad when weighing consequences. Utilitarianism can be particularly useful when assessing outcomes that may impact large groups of people because it acknowledges that there may be gray areas of conflict. Outcomes have some good and some bad, but it’s important to identify the outcome that maximizes good and minimizes harm.
According to Mill’s view, Paul should seek an action that does the least amount of harm. While we are trained pleasure seekers, it is possible to find happiness in the happiness of others. In this case, Paul should seek to minimize the negative impact of Linda’s actions. If Linda gauges Poseidon, she and Paul will be handsomely rewarded with their bonuses, the group head will congratulate them on the extra profitability, and perhaps shareholders will be rewarded with a slight increase to EPS. On the other hand, Paul and Linda could both lose their jobs and face criminal charges. The trading desk could be exposed for unethical behavior, which would circulate amongst competition and would likely create significant revenue headwinds. The reputation risk to FirstAmerica Bank is quite high, and given the consultative nature of the job, trust would be broken.
Conclusion:
After considering the negative impact to the client and the potential to materially damage the Bank’s reputation, I find the action of sending falsified pricing information ethically indefensible and morally reprehensible. In addition to the ethical issue, the misleading / falsified information would likely have legal consequences, as sending the fax would be considered fraud. Finally, the long-term financial ramifications drastically outweigh the short-term gains of one deal’s price gauging. I would not send the fax with falsified pricing information.
While it’s easy from my view to say Paul should not send the fax, one must consider the extraordinary circumstances, the intense pressure from management, and Paul’s naiveté—he was an inexperienced employee who was partially indebted to Linda for his job. I would argue that Paul, in fact, should escalate the issue to Peter, First American Bank’s Sales Manager for Derivatives. Paul should document the questionable behavior and outline Linda’s missteps, as he will almost certainly be blamed and used as a scapegoat. If, as anticipated, Peter fails to act upon learning about Linda’s behavior, Paul should escalate the issue to the senior vice president and elucidate his problem.
If Poseidon is not sophisticated enough to understand the cross currency swap’s pricing, it is Linda’s job, and one can argue, her fiduciary duty to educate her client, not take advantage of them. If the client has full knowledge and agrees to the richly priced swap, the onus is on them. However, in this situation, Linda has clearly misrepresented the facts and has intentionally deceived Poseidon.