14 Questionable ethical legal business practices

1. Bad behavior

Bryan P. Marsal, co-CEO of Alvarez & Marsal and CEO of Lehman Brothers, oversaw the largest bankruptcy proceedings in history-the Lehman Brothers bankruptcy filing in September 2008. In a speech to a group of businessmen, he was asked to comment on the current state of business ethics. According to reports, he said, “No.” Marshall’s response brought attention to the legal but annoying behaviors that permeated the financial crisis and led to some major reforms, especially the passage of the 2010 Dodd-Frank Act.

2. Pig lipstick vs. honest advice

Perhaps nothing better illustrates the way Wall Street works than the antics of Henry Blodgett, an analyst at Merrill Lynch. Blodgett was the leading Internet and e-commerce analyst on Wall Street during the Internet boom. He is notorious for publicly recommending the technology stocks he mentioned in terms of “junk” and “disaster” in private emails.

According to Blodgett’s recommendation, Merrill Lynch brokers actively sell these “junk” stocks to investors. When technology stocks plummeted, client portfolios were hit hard. Although Blodgett’s behavior was very immoral, it was still legal. As a result, he was banned from entering this industry, not because he promoted stocks he didn’t like, but because the company he promoted was a customer of Merrill Lynch Investment Bank, which created a conflict of interest. Today, compared with before Blodgett’s fiasco, investors’ trust in Wall Street analysts has declined.

In 2002, Blodgett was ridiculed in a famous TV advertisement for the agency Charles Schwab, in which a strong Wall Street veteran told some brokers to “put lipstick on this pig!”

3. Complex Securities vs. Beware of Buyers

The seemingly endless implosion of a series of complex investments, including credit default swaps, special investment vehicles, mortgage-backed securities and hedge funds, has left a series of broken investment portfolios and confused investors . These investments and other similar investment structures are difficult for even sophisticated investors to fully understand. This clearly shows this when investment collapses and drags down the portfolios of arguably knowledgeable foundations, endowments, corporate pension plans, local governments, and other entities.

As marketing and sales strive to downplay the risks of these investments and oppose investors’ “obligation” to understand the products they buy, investors have posed some major challenges to these noble opponents.

4. Window Decoration

Window decoration is a strategy used by mutual funds and portfolio managers towards the end of the year or quarter to improve the appearance of portfolio/fund performance before showing it to customers or shareholders. As a window decoration, fund managers will sell large-loss stocks and buy high-flying stocks towards the end of the quarter. These securities are then reported as part of the fund’s holdings.

Since the holdings are displayed at a point in time, not on the basis of buying and selling, it looks good on paper and can be provided as an official result of the mutual fund company. What can investors do besides reading and believing it?

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5. The interest rate paid to investors and the interest rate charged to borrowers

If you go to the bank and deposit $100 in your savings account, you will be lucky if the bank pays you 1% interest every year. If you take out a bank-guaranteed credit card, the bank will charge you 25% or more in interest. Now, what’s wrong with that photo? According to the bank, there is nothing. All of this is completely legal.

Even better, from their point of view, they can charge depositors for talking to tellers, fees for insufficient balances, fees for using ATMs, fees for ordering checks, fees for returning checks, and for increasing profits and good measures. More costs for other services invested. Then, if depositors decide to borrow, they can charge loan origination fees, loan service fees, annual credit card fees, and interest on credit cards and loans. All of this is completely legal and completely public, which may confuse ordinary bank customers.

6. Higher interest rates for “bad” credit and lower interest rates for “good” credit

If you have trouble getting through (perhaps you lost your job or owed some bills) and tried to stand up again after your credit rating was hit, you might be charged a higher interest rate next time you borrow money. You will pay more for mortgages, car loans, bank loans, and almost every other loan you can imagine.

On the other hand, the rich can get loans with the lowest interest rate. It is standard practice to charge higher-risk customers more fees. This policy makes sense on paper, but it does no good to people who work hard just to make ends meet.

7. Subprime mortgages

Subprime mortgages are a special variant of the “higher interest rate for bad credit” theme. Borrowers with credit ratings below 600 are often trapped by subprime mortgages that charge higher interest rates. Borrowers with low credit ratings usually do not get traditional mortgages because lenders believe that the borrower’s loan default risk is higher than average. Delays in paying bills or declaring personal bankruptcy are likely to put the borrower in a situation where only subprime mortgages can be obtained.

8. Investment companies sell stocks to clients and sell stocks in other accounts

One part of the business is busy selling stock X to customers, while the other part of the business that manages funds on behalf of the company’s own account is selling stock X as soon as possible so that it can exit before the stock crashes. It is often referred to as a pump and dump scheme, and there are many variants that exist in one form or another. In some cases, the company’s broker is “advising” retail investors to buy, while the company’s hedge fund partners are told to sell. In other cases, two “partners” get conflicting advice, and one party buys from the other, even if the “suggestion” provider expects the buyer to be burned. Just like in Vegas, in the final analysis, the advantage lies in the house.

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9. Stock recommendation

Investors seek the opinions of stock analysts to understand whether a company’s stock is worth buying. After all, analysts do research all day long, and most investors just don’t have the time or expertise. Through all these analyses, one might expect that the recommendations for the entire investment field are fairly widely distributed, including “buy”, “hold” and “sell”. However, although it may be difficult to conduct comprehensive stock research for retail investors, many investors may have noticed that most analysts are generally unwilling to give a sell rating. This is usually because, despite potential conflicts of interest, most sell-side research analysts remember that the brokerage business is built to trade stocks to customers.

For retail and buy-side investors, this may lead to the need not only to focus on ratings, but also to look at the overall sentiment brought about by recommendations. Often, analysts’ true opinions can be found in their estimates of the company’s sales, earnings, and price targets.

10. “Freezing” and termination of pension plans and payment of pensions to workers

Imagine that you have been working all your life and dedicated your best time to a company. However, a few years before you planned to retire, the company froze the pension plan. Then in the year you are about to quit, they completely terminate the plan and give you a one-time check instead of a lifetime pension check. The worst part? It happens often and is completely legal.

11. Class action and justice for the wronged

So what if the “little guy” realizes that he has been wronged by a big company? Under normal circumstances, he may take the company to court. However, since this little guy usually cannot afford the legal representatives needed to fight the company’s behemoths, he looked for a lawyer who represented a large group of shareholders in similar predicaments.

For example, suppose that the lives of 1,000 people are ruined by unwise investment purchases. If the victim is settled, the lawyer can ask for a large part of the money, or even more than half. For example, a settlement of 10 million U.S. dollars can be divided into 5,000 U.S. dollars for the plaintiff and 5 million U.S. dollars for the lawyer, both of which are legal. The “little guy” may spend a day in court, but there is no guarantee that he will get the reward he deserves, especially if his lawyer wants a large settlement as payment for his services.

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12. Intellectual Property

The Trump administration has paid attention to one of the most problematic corporate actions, especially in China, intellectual property theft. Although the actions of such companies are legal and illegal, its attempts may help some Chinese companies to rise. For example, Huawei is under tremendous pressure for its competitive culture, which seems to promote copying and theft of intellectual property for its own benefit.

13. Other corporate actions

Intellectual property rights are not necessarily the only way for companies with dubious morals to seek an advantage. Other suspicious business practices that are easily overlooked include deceptive product marketing, unfair competition plans, employee manipulation, environmental impact, and exchange of terms or bribery agreements. Companies may use these strategies for their own benefit, but they may also face the risk of litigation and shareholder opposition.

14. Creative and/or active accounting

The company’s business is to generate profits and report strong performance. Abandoning ambitious goals can inspire creativity and motivation for positive financial reporting, thereby increasing the overall view of the company’s success.

Many companies, including Enron, WorldCom, and Tyco, have made history for their illegal activities related to creative accounting. However, not all creative and radical accounting methods are necessarily illegal. Companies can seek to improve performance in a variety of ways, usually right before the earnings report. Some of these plans may include creative non-GAAP reports, emphasis on IFRS results, lack of disclosure of distress situations, stock issuance and repurchase plans, income and expenditure timing, asset holdings and sales, pension plans, and the auspicious use of derivatives .

The Sarbanes-Oxley Act of 2002 implemented a stronger framework for the financial reporting of listed companies, which helped mitigate some of the risks for investors. However, executives in the trenches have a keen understanding of their financial reports and the best creative measures to show stakeholders the most beneficial results.

Bottom line

It may be difficult to believe that some of these ethically dubious business practices are still alive and thriving, and at the same time legal and possibly legal in the eyes of legislators. However, understanding these unethical methods can help you avoid them as much as possible. The above examples are just a few examples. Although the intent of the regulator is the best, the law may not provide the most appropriate protection.

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