Analysts and fund managers come and go, banks and asset management firms rise and fall, and investing trends appear and disappear with surprising regularity. And yet, for all of that change, one thing seems to remain the same: despite pretty clear (if not tiresomely thorough) rules and compliance procedures, people continue to flout laws and common sense in the overall pursuit of making a buck.

Facebook Spreads the Misery
More than a few forests of e-trees have been felled in the discussions of the rise, fall and controversy surrounding Facebook (NYSE:FB) as both a company and an investment. Now, however, there are some more interesting developments from a legal and ethical perspective.
Investors are likely already aware of various lawsuits tied to the dysfunctional trading that surrounded Facebook's IPO. Accusations have also been made, however, that the banks that handled Facebook's IPO (Morgan Stanley (NYSE:MS), JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS)) may have disclosed their concerns about various risks in the Facebook business model to certain select clients. As you might imagine, this is a clear no-no and if the banks are found guilty there will likely be fines assessed against the company and possibly additional punishments for individual wrongdoers.

Whatever the outcome of those accusations, Facebook-related wrongdoing has already cost at least two analysts their jobs at Citigroup (NYSE:C). Regulators have alleged that a junior analyst at Citi basically shared his investment thesis with bloggers at TechCrunch as they were in the process of initiating coverage on Facebook. Although I can tell you that it was not uncommon 10 or more years ago to see analysts have companies review reports ahead of publication, it is no longer permitted (and distribution to an outside third-party like bloggers would never have been permissible).

It doesn't stop with the junior analyst and his poor judgment, however. Citigroup's senior analyst, Mark Mahaney, has also been fired, due in part to a failure to supervise his junior analyst, but also apparently for some other missteps regarding external communications. In addition to the firings, Citigroup has had to pay a $2 million fine to the state of Massachusetts.

Insider Trading - Why Abandon a Classic?
I would expect that those who have worked on Wall Street's sell-side wouldn't be too surprised with the Citigroup-Facebook debacle, other than perhaps being surprised that they were sloppy enough to get caught. As I said, this sort of wrongdoing has been going on for a while.

What surprises me, however, is the number of insider trading cases that continue to pop up. While there are some situations where the rules are ambiguous, the reality is that insider trading (and the illegality of it) is pretty cut-and-dried. What perpetuates it, then, would seem to be both the difficulty of catching the wrongdoers (and thus, a belief that people won't get caught) and the more basic motive of greed.

In the past month alone, there have been accusations that an employee of J.Crew used internal store sales and expense information to trade ahead of earnings announcements in 2009 (J.Crew was taken private in 2010). Likewise, the former head of investor relations at Carter's (NYSE:CRI) has been accused of insider trading.

Prominent Indian businessman Rajat Gupta was recently sentenced to two years in prison for his role in passing information from Goldman Sachs board meetings to an outside hedge fund investor, and Japanese investment bank Nomura is presently involved in four of six ongoing major insider trading investigations in Japan.

Rules Change, but People Don't
I can speak from personal experience that the rules, regulations and limitations on what sell-side analysts can do in the course of their work have tightened considerably over the last 10 or 12 years. Likewise, there have been more fines, suspensions (and outright industry banishments), and criminal prosecutions than before, both on and off Wall Street.

And yet, the misdeeds continue. Frankly, I suspect that they always will. A lot of Wall Street analysts, bankers and other employees feel like they're in a cat-and-mouse game with internal compliance supervisors and outside regulators - it's probably inevitable that smart and aggressive people will look for loopholes and shortcuts in the pursuit of some sort of "edge." Likewise with insider trading; while the SEC takes these charges much more seriously today, those who are inclined to break these laws will probably continue to either convince themselves that they're not "really" breaking a law and/or that they can't/won't get caught.

Consequently, there's really no happy ending to this story - Wall Street firms (and those tied to Wall Street, such as publicly-traded companies) have always had their rule breakers and wrongdoers, and as recent charges and sentences show, they still do.

At the time of writing, Stephen D. Simpson owned shares of JP Morgan since 2006.

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