By Harvey George, Alumnus of The Young Investment Banker Programme 2016
In 2007 an investigation into allegations made against (at the time) Deutsche Bank employees for insider trading began.
Insider trading is an illegal exchange of information - which is not yet publicly available - that is used for the financial gain of an individual through trading activity. More clearly, when a firm requires assistance/expertise in a business venture, they will contact an investment bank - in this case Deutsche bank - to arrange a meeting to discuss the courses of action to achieve their targets; for example a merger or acquisition. The firm's CEO or chief executive along with other important shareholders will meet with a representative from the investment bank and proceed accordingly.
At this stage of discussions each case is kept within the confines of utmost secrecy, behind what is known as the 'Chinese wall'. It is an ethical barrier of information, to protect against the misuse of such information arising from a conflict of interest. Insider trading occurs when this wall is breached and traders will execute trades based on information not yet available to the public.
The purpose of the Chinese wall is to maintain client confidence that their business plans are not exploited for an external party's benefit.
In the recent case – which some are calling the largest case in the history of the country - several senior members collaborated to seek financial gain, with the use of 'burner' phones (untraceable) and encrypted memory sticks to transfer the information.
Together the group of men made £7.4 million in illicit profits by trading stocks such as Sky Plc. and Legal & General Group Plc.
This is by no means the first example of insider trading, however it is because of this very reason that the 4 and a half year sentence given to Martyn Dodgson is the most severe in UK history. It acts as a signal that the continual exploitation of confidential information is not acceptable and is harshly punished.
What this means for the industry? In a way this is a positive step forward for the Investment Banking industry, despite the obvious initial drawbacks for the sector – especially for Deutsche Bank – in that short term public perception will deteriorate, but once the dust has settled, the public view of the industry is likely to improve as they regain confidence that these 'too big to fail' firms are operating within the confines of the law.
For the future of the industry this will mark a significant turning point about the attitudes of the courts towards insider trading offences - as Martyn Dodgson of Deutsche Bank found out so dramatically. The outcome of his trial is an indication that these offences will not go unpunished, acting as an example to the sector’s workers that such actions are not acceptable, by any degree.