Bear Stearns and the Tour de France

There is another case of email messages being used to identify possible wrongdoers in the financial services industry (see “Prosecutors in Bear Case Zero In On Email”, Wall Street Journal).

Anyone in the US financial services industry should be well aware that regulatory compliance requires that employee email, IMs and file uploads are tracked and cached. Over the last decade when prominent cases emerged where old emails were used as evidence I thought that this common knowledge would not so much improve ethical standards as push unethical behavior to other forums, such as the phone, face-to-face meetings and the use of allusions.

So it is surprising to see people make the same mistake as recently as mid-2007, as the Bear Stearns employees’ old emails may show that they acted contrary to their clients’ interest. My take is that as long as enough money was being made, sketchy actions that improved performance did not attract notice, but once the market tanked, it became a matter of assigning responsibility. Electronic messaging supervision (the active monitoring and spot-checking of emails by compliance personnel) helps catch problematic behavior, but not even the best system can catch every ethical lapse as it occurs.

Breaking the rules in sports is similar. In ultra-competitive contests such as the Tour de France, cyclists have used doping in order to qualify and perform above their natural peak. Again, this strategy calls for breaking the rules to improve performance. Doping is not used by all competitors, but one must assume that all competitors have the ability to use it. Prize money is high. Some are caught and some not. And in the Tour de France, this has been going on for the last century.

Hence the paradox: there are industries and contests so competitive that it can be necessary to break the rules in order to compete. Governance bodies then often eventually identify and ban these same rule-breakers, but only after they have done the damage. A behavior may be prohibited (insider trading, options backdating, doping) but the means to catch the behavior often lags behind the means to evade detection.

Perhaps the only means to reduce these types of unethical behavior is to reduce the dramatic temptation that huge compensation gives to the competitors, whether in the form of a massive annual bonus or prize money and future sponsorship contracts.