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Jul 23, 201302:31 PMOpen for Business

with Jody Glynn Patrick

SEC puts teeth in ‘duty of care’ — how it could bite you now

(page 1 of 2)

A Securities and Exchange Commission insider told The New York Times that the 24-hour period between Thursday and Friday of last week was “rare” for the SEC, and indeed, it validated the new zero-tolerance posture being taken by the agency’s tough incoming chairwoman, Mary Jo White. During that brief period, the SEC (surprisingly) rejected a settlement with billionaire hedge fund manager Philip A. Falcone and then charged Steven A. Cohen, another billionaire trader, with administrative wrongdoing.

Before the end of the working day on Friday, it also formally accused the city of Miami of securities fraud. Most people can’t imagine being professionally caught up in any of that drama, but it’s the charge against Cohen that could have ramifications for all business managers everywhere.

Cohen’s situation is this: Two of his SAC Capital Advisors portfolio managers are facing trial in November on charges stemming from a 10-year investigation of the hedge fund for trading on insider knowledge. Mathew Martoma is accused of improperly acting on data about a clinical drug trial while Michael S. Steinberg allegedly traded on confidential information about Dell’s financial performance. The pair will face trial in November. Unfortunately for Cohen, the SEC is now intending to bar him from overseeing outside investor funds in the future, which would essentially shut him out — though he, himself, was never formally accused of insider trading or fraud and has vehemently denied knowing anything about it. The charge against him is that he failed to properly supervise the activities of his underlings.

“Failure to supervise employees” is a fatal but common “duty of care” mistake. The subtext of the duty of care expectation is that all managers (and that definition now extends even to team leaders) are held accountable for knowing and enforcing proper company policy and doing so in compliance with all local, state, and federal laws. Duty of care is a legal expectation that applies to every manager in every workplace, requiring that they act with the watchfulness, attention, caution, and prudence that would be shown by a reasonable person to stay within policy boundaries. Ignorance of duty of care tort law does not release a manager from liability for failure to act when necessary, or for supervision of employees who act outside of accepted policy.

For example, Cohen is held to a standard, as a manager, to make sure money is spent correctly and also to ensure fraud is avoided, inappropriate spending does not occur, transparency and accounting records are valid, and steps are taken quickly to rectify problems when found. Short of that due diligence and reasonable expectation, he is chargeable under civil law for fiscal negligence. And now, it appears, with the charging of his agents under criminal law (remember, he was never personally shown to have any responsibility that rose to that level of culpability), he is chargeable under administrative law for a duty of care failure.


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