Identification and Analysis of Unethical Criminal Conduct Following Equities Market Crash 2000 to 2002

¶ … Unethical/Criminal Conduct following the Equities Market Crash 2000 to 2002

This paper is a discussion of the identification and analysis of unethical and criminal conduct following the equities market crash from 2000 to 2002. The paper begins with an Introduction to the problem in Chapter One that also contains the hypothesis for the paper, the definition of terms section, and other valuable information. This information sets up the rest of the paper and gives rise to the belief that there was a great deal of unethical and criminal conduct in this country following this event.

A review of the literature follows in Chapter Two where information available about the issue will be presented and discussed. At least 60 sources will be analyzed in order to receive a complete picture of the issue. Chapter Three will then set up the methodology for analyzing this literature and determining what, if any, decision can be reached about the validity of the hypothesis.

Chapter Four will present the qualitative findings that have been determined based on the literature review and analysis of the data, and Chapter Five will offer conclusions, recommendations, and a summary of information the collected information. It is important to conclude the study with this summary type of information and also to look toward the future of the equities market and what may happen to it.

THE IDENTIFICATION AND ANALYSIS OF UNETHICAL AND CRIMINAL CONDUCT FOLLOWING THE EQUITIES MARKET CRASH FROM 2000 TO 2002

CHAPTER ONE

INTRODUCTION

Statement of the Problem and Hypothesis

Between 2000 and 2002, the equities market crash had the potential to cause a great deal of criminal activity and unethical conduct by those that lost much of what they had. Whether this conduct actually took place will be the main focus of this paper. If these things did occur, identifying them and analyzing them will then become necessary. Conduct such as this, that involves the criminal and the unethical, is one of the main issues that can occur when there is a crash in an equities market or stock market.

Unfortunately, not all who engage in this type of behavior are discovered and prosecuted, and some that do get caught avoid it for years. This is a concern, and it is becoming increasingly more important to identify these deceptive individuals and ensure that they be stopped early on. To do this, the issue must be considered and studied, or important and necessary changes will not be made to existing systems that check for this kind of problem and work to stop it.

Some may feel that this type of criminal activity does not occur, but there is a concern that these people may be misinformed about what goes on when the equities market has difficulty. Instead, the belief of many is that equities market problems create the potential for much criminal activity and unethical conduct because many people feel that this type of behavior is the only way that they stand a chance of making back any of the money that they have lost.

Based on this understanding, it is believed that this type of activity does occur, and therefore the following hypothesis will apply to this study:

Unethical and criminal conduct is likely to occur, and presumably does occur after an equities market crash. Further, this type of behavior did occur between 2000 and 2002 when the equities market crashed.

This hypothesis has been presented based on the opinion that this type of unsavory behavior occurs more often than is easily realized, and it is only the individuals who get caught that make news and come to light in the media. There are likely others who get away with this behavior, and because the equities market is so big and the stakes are often very high, some feel as though they must recoup their losses, whatever the risk.

Equities trading is a large risk in and of itself, so the people that work in this type of market are already used to the idea of taking risks. Whether the risks are legal or illegal will depend on the type of person involved, and it is therefore quiet possible that this line becomes somewhat blurred for some individuals at various points in time. This is especially important when there is a fluctuation in the market that could indicate a downward turn.

Because of the concern that individuals might engage in this type of behavior, it is necessary to study the problems that come about when the equities market takes a bad turn, in order to determine the causes of the unethical and criminal behavior that problems with the market allegedly bring.

Purpose of the Study

The main purpose of the study is to shed light on the issue of unethical and criminal conduct in the equities market, especially where market crashes and their ensuing difficulties are concerned. To do this, the study must examine the literature that is presented in the following chapter and analyze it to determine whether this type of conduct does in fact take place. It is also important to discuss the specific types of unethical and criminal behaviors that surrounded the equities market crash between 2000 and 2002, as there are several activities that could be considered problematic.

Finding this information will help future researchers to continue the study into this issue, and will also help to show the extent of the problem and what was done to the individuals who had engaged in this behavior. A further purpose of this study is to determine why these individuals felt the need to engage in this type of behavior when they clearly had so much to lose if the authorities noticed their conduct.

A study of this kind has value for many individuals who wish to utilize it, but the largest purpose is simply to gain information about this issue so that more answers to questions about it can be obtained.

Studies such as this one allow for more research into areas that have previously been somewhat unexplored, and they also allow for new ideas that may shed light into concerns that have not previously been addressed thoroughly enough to satisfy the questions that they can bring about. It is because of this and other concerns that there is a pressing need for more information on this topic.

Reviewing the literature into an issue such as this and analyzing this literature in the hopes of understanding more about it will allow for further studies and the production of more and valuable information, which will in turn help to avoid problems such as this in the future. If it can be determined not only what kind of behavior these individuals engage in but what drives them to commit illegal acts, it is possible that ways can be found to build failsafes into various areas of the market.

By doing this, there may be fewer chances to involve themselves in illegal and unethical acts in the future. This will improve the state of the industry and prevent future criminal activities in the area of equities market difficulties.

Importance of the Study

This study has a great deal of importance for those that deal in the equities market and those that investigate it. Both of these groups, as well as researchers, will be affected by the information imparted here and in other studies of this kind. Those that work in the equities market can learn much from the mistakes of others, and it is important for them to be aware of these problems that others have been through so that they can be avoided in the future. It is not always the case that someone sets out to do something deliberately deceptive, although this also happens. Sometimes, there is a lack of understanding as to what is illegal and what is not, and these types of rules must be better understood.

Other times, there is no problem with illegal issues, but the unethical difficulties that these individuals face are problematic. This can result from making decisions that are inappropriate and unethical, and these types of decisions do not have to be illegal to cause difficulties for the individuals that make them. There are many things that can legally be done in the equities market that are unethical in some way, and although these individuals cannot be charged with any kind of crime for their unethical actions, they are often condemned by others for the way that they do business.

When markets crash, there is often much more of this type of activity because those that are aware of what they could lose are interested in saving what they can. Some will turn to illegal activities in the hopes that they can get away with it. Others will not be the types of individuals that will do this, or will not want to take that much of a risk, but that does not mean that they will not be interested in activities that others would not see as commendable.

Scope of the Study

The scope of the study is far-reaching and broad, as some of what applies to the equities market can also be applied to the stock market and some of the problems that market crashes there have caused. By looking at the far-reaching implications that illegal and unethical behavior can have on those that commit them and on the others that they deal with, as well as their families, it can be seen that there are many others that are affected by one person or company decides to do.

For this study, the scope will be large in that the issues could extend much farther than they already do, but the actual amount of information studied will remain limited to the equities market instead of incorporating other, similar issues into the mix. At this point, that would only serve to confuse things and make matters more difficult.

By utilizing a smaller database of information, the study will be less confusing, but by showing how this information could extend to other issues, the scope of the study can remain large while the study still stays focused on the equities market. This will help to show how the equities market has difficulties, but that it is not the only area of trading that has been plagued by unethical and illegal behavior, especially when crashes occur and everyone begins to worry about what they have put in and how much they will lose.

Rationale for the Study

The rationale for this study is based on the fact that more research needs to be done into this issue. While research has already been conducted into this area and much has been written about it, there is still room to provide a new analysis of this information and a compilation of literature that will help with a deeper understanding of the issue. Understanding this issue is vital to a deeper understanding of the equities market and also of human nature when people feel that they are being threatened by something specific.

Many individuals will choose a path that they normally would not when they feel that they are threatened, and this needs to be explored in the context of the equities market and the period of time between 2000 and 2002. This is the area of history during which there was a large upheaval and a market crash, which caused many difficulties for those that had much riding on equities and investments. These people turned to unethical and illegal activities during this period of time, and in order to understand exactly why, this period of time must be studied, so that the information that is found can help researchers and others in the future.

Overview of the Study

The information presented here in Chapter One will be followed by a thorough review of the literature in Chapter Two. Chapter Two will seek to analyze all of the important and available literature into this area of discussion and ensure that nothing vital is left out of the analysis of what kinds of activities these people engaged in and how prevalent these types of activities were.

Whether these activities took place is not the only concern that many of these individuals are faced with, and not the only concern that interests researchers. Specifically what activities took place is also important to discuss, as well as how many of these activities took place and whether they were the exception or the rule between 2000 and 2002.

The review of the literature will seek to provide the information for these issues and hopefully will give indication of this problem and its importance to those in the equities market and to those that research these types of issues.

In Chapter Three, the methodology will be discussed, and it will be shown how the literature review will be utilized to deal with any issues that will be shown to be important and also to validate or invalidate the hypothesis that unethical and illegal conduct was a problem in the equities market during 2000 to 2002. This Chapter will not analyze the data collected in the literature review, but will talk about the way that the data will be analyzed and what will be looked for during that analysis, which will take place in Chapter Four.

Chapter Four will provide a thorough analysis of the data presented in the literature review, using the information from the methodology chapter about how this is to be done. It is hoped that it can be determined from this analysis as to whether the hypothesis presented is valid or invalid, and also whether there are any safeguards to avoid this type of problem in the future.

These safeguards can be anything from ensuring that there are fewer ways to engage in this type of behavior, to finding more ways to catch individuals who choose to engage in either illegal or unethical behavior during periods of uncertainty in the equities market. They are important, and if they have not been created yet, then there should be studies in the future into why they have not been and if there are ways to create them.

Chapter Five will deal with the Summary, Recommendations, and Conclusions that can be drawn from the study. The summary will recap all of the study information, the recommendations will suggest what is necessary for the future in the form of further study and issues that must be addressed, and the conclusion section will draw conclusions about the information collected for the study, the way that it has been analyzed, and what it means for those that deal with equities market trading and those that study this issue.

CHAPTER TWO

REVIEW OF THE LITERATURE

Much of the problem that occurred when the equities market crashed in 2000 had to do with the way that regulations dealt with issues, and the way that the regulators themselves set up their rules and handled problems (Clements, 2002). The literature review will therefore discuss the issue from that point-of-view in an effort to show that much of what went on in an illegal or unethical way had to do with the rules that could be bent or broken to suit various investors.

Not all investors are overly rational individuals and many of the decisions that they make are influenced by various biases (Griffin and Tversky, 1992; Barberis & Huang, 2001). This does not help their ability to make good returns and when this happens they often turn to criminal or unethical activity in order to make back the money that they have lost (Hanson & Kysar, 1999; Fischhoff, 1975). Some of them pay larger commissions and others simply do not seem to understand how trading works in such a way that they can consistently make money at it (Hanson & Kysar, 1999).

This investment problem is not just with individuals who are investing in the market but those who are charged by various companies to invest money for others (Hanson & Kysar, 1999). Insurance companies, mutual funds, and pension funds all have some of these biased investors and this hurts those who the money is invested for (Hanson & Kysar, 1999).

This is problematic, naturally, for many and it has been increasingly important since 2000 when the equities market crashed based on the problems in technology (Greenfield, 2002). Much of the way that this should be looked at deals with securities regulation and the behavioral approach to it (Greenfield, 2002; Gervais & Odean, 2001).

The reason behind this is to stop the assumption that all individuals will act rationally in every decision that they make (Bazerman, 1994; De Long, 1990; Fama, 1970). This lack of rationality and the biases that various investors have greatly affects how ethical they all are and whether they will engage in any type of criminal activity (Arkes, 1991; Tversky & Kahneman, 1982; Tversky & Kahneman, 1974; Tversky & Kahneman, 1991). Many biases that these investors have come into play when they choose to make decisions about what they should invest in (Barber & Odean, 2001; Kahneman & Tversky, 1982; Kahneman, Knetsch, and Thaler, 1990).

These include being overconfident and overly optimistic about issues, feeling that they have confirmation for something that they are doing, and relying on issues that are inappropriate for the decisions that they are making (Barber & Odean, 2000). Some individuals have tried to categorize these various biases to determine why individuals act the way that they do, but there has not been a specific underlying theory that has emerged from this issue (Barber & Odean, 2000). Because of this, the reasons that individuals commit unethical or criminal behavior when it comes to these types of investment issues are still largely unknown (Barber & Odean, 2000; Arlen, 1998).

It is also suggested that looking at this issue from a behavioral approach may not be the best way to go about it, as not all individuals utilize the same reasons for specific types of behavior and therefore looking at investors who commit criminal or unethical acts based on a particular type of behavior may not be the best choice (Langevoort, 1996; Carter, Dark, and Singh, 1998). Despite some of the issues with this, however, there have been various individuals that have looked at economics and behavioral theories and have chosen to apply these to the market (Korobkin, 2003).

Having too much confidence in investment abilities is one of the common problems that these investors usually face and this is also one of the ones that leads toward unethical behavior and criminal activities because many of these individuals lose a great deal of money (Langevoort, 2003).

This comes from assuming that they know what they are doing and taking an investment risk that they normally should not or would not have taken (Langevoort, 2003). Because they choose, however, to take this risk, much of the money that they would have made is lost and therefore they must find some way of trying to get this money back again (Langevoort, 2003).

For some individuals, this can lead to criminal activity (Langevoort, 2003). These individuals will then look at what type of investing might provide the best return to them with the least risk, and shortly before the year 2000 this was technology stocks (Langevoort, 2003). There was apparently very little risk because the stocks were growing so rapidly and investors were assuming that there would be no chance that these stocks would fall (Langevoort, 2003).

They utilized not only this opinion but also the overconfidence discussed earlier to make decisions that greatly impacted them and many individuals who came to companies that had specific investors handling their money for them (Langevoort, 2003). Many of these investors relied on gut instinct and opinion instead of actually studying what they should have looked at for various stocks and other issues (Langevoort, 2003).

Some of the other significant risks that these investors took was heavy investment in the stock of a particular employer (Langevoort, 2003). This is what got a great many of the individuals in trouble when technology collapsed (Langevoort, 2003).

Most of these individuals had investments and the investment was largely in the company stock (Langevoort, 2003). Because of this lack of diversification, these individuals lost all of their savings and pension plans when the companies folded and disappeared (Langevoort, 2003).

Investors who had diversified this money instead of putting it all into the company stock could have salvaged at least some of what an individual needed to survive and even though that person may not have had a pension plan when they retired they would have at least had some money in the form of securities and investments that they could have drawn on to pay for the necessities of life after they retired (Langevoort, 2003).

Many investors who have made bad choices and then turned to criminal or unethical activity to get out of them have simply been bad judges when it comes to probability (Langevoort, 2003). They may look at individual companies and not see the danger that may belong to one of them or they may not see the risks of a particular company since nothing along those same lines has been brought to the attention of them or others who work with them (Langevoort, 2003).

When the Enron scandal happened, this was considered a very large event and investors went the opposite direction (Langevoort, 2002). They overreacted and they became so concerned about the risk of fraud that they were much more unwilling to invest in any kind of technology company, even those who were legitimate (Langevoort, 2002).

Not all technology companies or other large companies who were growing rapidly had problems but unfortunately many investors did not see this and this lead to behaviors that greatly changed the way individuals invest in particular issues in this country (Langevoort, 2002). Investors who had great deals of money and were fortunate whether they engage in criminal or unethical activity or not, tended not to look at this money as being as important as they would if they had to work harder for the money that they get (Langevoort, 2002). Investors, however, are not the only ones that have biases into particular issues (Langevoort, 2002; Choi, 2001).

Many of those who consider themselves financial professionals also have behavioral biases and when they see these in investors they may use them to their advantage (Jacob, Lys, & Neale, 1999; Brealey, 1996). These investors place a great deal of trust in the brokers and even if the decision appears to be unsound, once it has been made they often stick with it (Jacob, Lys, & Neale, 1999). Brokers who are interested in making a great deal of money off of this issue often make sure that these investors are skewed toward investments that are inappropriate and will not do well (Jacob, Lys, & Neale, 1999).

This is, naturally, rather unethical, but it is done quite often by brokers who want to make a great deal of money and do not want to have to work as hard as they normally would for it (Jacob, Lys, & Neale, 1999). Much of this happened with the stock that was involved in the technology issues and the crash that came in 2002 (Jacob, Lys, & Neale, 1999). Because of this, a great many people suffered for issues that they would not normally have had to (Jacob, Lys, & Neale, 1999).

Some of this can be blamed on the investors but a great deal of it is also blamed on the brokers and some of the things that they did to ensure that these individual investors would be willing to continue to put money into various companies (Jacob, Lys, & Neale, 1999). The culture that the investment organization tends to have may have a great deal to do with these types of problems (Jacob, Lys, & Neale, 1999).

There is a lot of pressure on investors and brokers to do well and many of these individuals may feel this pressure so strongly that they attempt to find ways that may be legal or unethical to make more money and look as though they are doing better than they actually are (Jacob, Lys, & Neale, 1999).

This has to do with the fact that these individuals in various corporations may lie even when they stand to gain very little from the deception that they give to others (Jacob, Lys, & Neale, 1999). Some, however, engage in insider trading and other problems that also usually come back to get an investor or a company manager (Jacob, Lys, & Neale, 1999).

The cognitive dissonance of a particular group can be what leads to lying at a corporate level (Jacob, Lys, & Neale, 1999). Over optimism in a particular company may be created by the culture of that company and this can lead managers of companies to mislead investors regarding the profitability that company has in the future (Jacob, Lys, & Neale, 1999).

Sometimes this can be an unwitting issue and individual investors do not realize that it is occurring, as well as the manager of the corporation does not realize that it is occurring (Jolls, Sunstein, & Thaler, 1998). However, whatever the reasons behind it if it occurs it is unethical behavior that should be avoided (Jolls, Sunstein, & Thaler, 1998; Thaler, 1980; Schleifer, 1997). This is part of what happened in 2000 and shortly before it when there was such a collapse of the technology market (Jolls, Sunstein, & Thaler, 1998).

Much of this came from outlooks based on future probability that were not completely accurate and also from various individuals who seemed to believe that they were going to make huge amounts of money when actually this opinion was extremely unrealistic (Jolls, Sunstein, & Thaler, 1998). Some of what caused the problem with this issue in 2000 also has to do with being naive in the sense that many companies believe that being optimistic can help enhance their bottom line (Jolls, Sunstein, & Thaler, 1998). This will not necessarily stop other companies from competing with them and will not stop a particular company from remaining in the game and attempting to be a good competitor (Jolls, Sunstein, & Thaler, 1998).

However, some of this competition can get out of hand and companies that feel that they must do better than their competition will often overemphasize their profits and many of their other good assets in order to cause investors to come to them instead of to other competitors (Jolls, Sunstein, & Thaler, 1998). This is a very large concern for many companies and many of the biases that individuals have about various companies cannot be easily corrected even if a company appears to be doing very well (Jolls, Sunstein, & Thaler, 1998).

There is not a lot of impact on the welfare of various investors when it comes to this and to some of the biases that can be alleviated if there is enough incentive to do well (Weinstein, 1980; Romano, 1986; Shefrin & Statman, 1985). Regardless of this, however, some low levels of bias are going to remain in most institutions and many are curious as to whether the SEC and others who can intervene in this area will actually work to change anything and make any difference based on the way that individuals ask questions (Tetlock, 2002).

Much of this has to do with the fact that the SEC also has biases and many of the regulators are human beings who are certainly not infallible and are capable of having their own biases and opinions about what is right and wrong or how something should be done (Sunstein, 2000). Just as investors and corporate managers can do unethical or criminal things, there is no law that indicates that SEC regulators will never engage in this type of behavior either (Sunstein, 1997).

Mostly, however, much of the issues that deal with criminal and unethical activities in the markets come from behavioral problems and also that the SEC does the best to make sure that these biases do not affect them so that they are able to do their jobs appropriately (Mitchell, 2002). There are quite a few biases that those of the SEC may face and it is important to discuss these because it is quite possible that various organizations that have evolved in the market have adapted to the SEC biases and run their companies in ways that will minimize these (Mitchell, 2002).

That does not necessarily mean that they are doing something criminal or unethical, or that they are not performing any of these actions. However, it does indicate that regardless of what an individual feels that he or she should be doing with his or her company, it is quite likely that SEC regulations will dictate much of this, but also likely that the SEC regulators themselves and the biases that they hold as individuals will have much do with how these individuals react and how they deal with their company (Pasha, 2002).

There are so many biases that may affect regulators and it is possible that they may affect them more strongly that they do investors (Prentice, 2001). The SEC's regulatory positions have individuals that have many biases and much of this has to do with some of the policy decisions that the SEC has made (Prentice, 2001). Analyzing the biases in the SEC will help to make sense of why some individuals who invest in various things in the market end up committing various criminal or unethical acts (Prentice, 2001).

The SEC is not often noted for being creative when it comes to the regulations that they make (Prentice, 2001). Disclosure tends to be the biggest issue that the SEC deals with and corporate governments and other problems are traditionally dealt with by asking for some type of this disclosure (Prentice, 2001). Because of this many of the regulators at the SEC are basically blind to the possible alternatives that would be very important for regulation (Prentice, 2001). They see this disclosure as the exposing of activities that potentially could have problems, such as those that could turn criminal or unethical if left unchecked (Prentice, 2001).

When SEC regulators ensure that disclosure is going on it helps investors and others to see the activities that companies are involved in and those that are competing in the market have much less chance of engaging in something that might cause them a great deal of grief (Prentice, 2001). Further, companies are all required to make much of their information open to the public and therefore have less chance of committing unethical or criminal acts simply because they realize that their chances of getting caught doing that sort of things will be much higher (Prentice, 2001).

However, some companies are good at accounting practices and other issues that make it appear that their disclosures are completely open an honest when in fact they are not (Posner, 1998; Posner, 1973; Mikhail, Walther, & Willis, 1997). These are the kind of companies that the SEC has difficulty locating and because they cannot find these individuals and put a stop to them many innocent investors are still hurt (Hirshleifer, 2001). This is what happened to a great deal of individuals who ended up caught up in the equities market crash of 2000 when technology stocks collapsed (Hirshleifer, 2001).

Because so many people had been involved with the technology stock it was easy for a lot of investors to be quickly hurt what it collapsed (Hu, 2000). The SEC was unaware of many of the violations that were going on in these companies because it did not appear on the surface that they were any problems (Hu, 2000). Eventually, however, the problems that these companies had came to light and the SEC was able to step in (Hu, 2000).

However, a great many individuals were injured before hand and analyzing and identifying the types of behavior that went on at this period of time will greatly help the future and hopefully stop much of the difficulty that occurred when individuals in the market chose to play unfairly with investors and their money (Hu, 2000). The SEC's rules for disclosure, however, do help to avoid some of the problems that individuals would otherwise be involved in with the market (Hu, 2000).

For example, when managers of a particular company are considering a transaction that may be self-dealing, they may choose instead not to go through with this transaction because they will know that transactions that are related to this must also be disclosed (Klibanoff, Lamony, and Wizman, 1999; Shogren, Sueng, Hayes, & Kliebenstein, 1994). Some of this related information may be something that the company does not want disclosed or the manager may feel that it is best to forego the transaction instead of leading the SEC regulators into something that they may find issue with.

Disclosure is very important but it should not be the only issue that the SEC deals with (Langevoort, 1998; Odean, 1998; Odean, 1999). As was seen in 2000, there are ways around this disclosure issue and therefore the SEC is not doing all it can to stop these individuals from committing criminal and unethical acts (Arlen, Spitzer, & Talley, 2002). It is also true that investors who suffer from many of the biases that are generally involved in making decisions of this nature may not be educated well enough or protected well enough by the disclosure requirements (Arlen, Spitzer, & Talley, 2002).

If these requirements are ineffective, they are not working to protect those who need them the most and therefore the SEC must do something to change these requirements or regulations and make them safer for all individuals involved (Brown, 2002). For example, investors who have a bias toward overconfidence and feel that they can do no wrong may look at the warning signs on a particular disclosure but they may ignore them in light of the fact that they feel that they know best (Bainbridge, 2000).

It is also important to look at those who have made an investment choice in the past that has been very poor and how disclosure may be able to help these individuals get over this (Friedman, 1953). It appears at the moment that getting over this type of bias about poor investment choices that have been made in the past cannot be done simply by disclosure statements (Elstein, 2002). Individuals who feel that they have made poor choices in the past often overlook the disclosure statements and even if they read them carefully they may still feel that there is something in them that they are missing (Cunningham, 2002).

This is some of what happened to the individuals who made unethical and criminal decisions in 2002. When the stocks began to fall rapidly in the technology sector the equities market was going down rapidly and those who had invested a great deal of money into technology realized that they must do something quickly to get out (Daniel, Hirshleifer, and Teoh, 2001). Investors who were naive and were not aware of the risks could buy technology stocks at that point very cheaply (Daniel, Hirshleifer, and Teoh, 2001).

However, they quickly lost the money that they had put in and many of these individuals may now feel that they do not want anything to do with either technology stocks in general or stocks that seem like their price is too low for what someone is getting (Choi & Guzman, 1998). It is clear that these things should be checked into, and disclosure statements are designed for that purpose Choi & Guzman, 1998). (However, those who want to engage in criminal and unethical activities can often still do so regardless of the disclosure statements that are provided or regardless of the fact that many are still uncomfortable with the disclosure statement because they do not necessarily feel like these statements tell the entire story Choi & Guzman, 1998).

Protecting investors from fraud is one of the most important things that the SEC has been charged with (Reber & Schwarz, 1999). When the Enron and WorldCom scandals hit the SEC realized that they were not doing everything they could to protect the investors that they were designed to help (Rachlinski, 2000). One of the ways that the SEC tried to help investors was to require a corporate chief executive officers to annually certify the financial statements of the corporation (Rachlinski, 2000). Congress quickly put this into law but it does not necessarily help investors in the way that they would have hoped (Rachlinski, 2000).

While it may be helpful to some because of the fact that these individuals will have less chance of being deceitful when they know that they have to put their name on a particular corporate document, some corporate officers would be willing to sign this document even if they knew that information in it was illegal or unethical (Rachlinski, 2000). Some individuals have such amounts of overconfidence that they cannot believe there is anything that can happen to them that will cause them difficulty (Rachlinski, 2000).

Because of this, and because of their beliefs that they can overcome anything and no one will catch what they are doing wrong, there is no guarantee that investors are safe simply because a CEO has signed off on a financial statement (Rachlinski, 2000). It is also possible that the CEO may not be as involved in the company as he or she needs to be and may simply sign the financial statement to get it over with (Rachlinski, 2000). Most CEOs who are not caught up with all of the information going on in the company will not go back through one year's worth of financial information to ensure that the financial statement is correct (Rachlinski, 2000).

This type of misinformation can easily be gotten past many CEOs, although it is likely that individuals today will be more careful about this type of issue given the Enron and WorldCom scandals, as well as others that took place during that period of time (Rachlinski, 2002). It is also true that there are risks that do not involve the financial statement and just because the CEO has signed off on this particular statement that does not necessarily mean that a particular investor is safe in taking a risk with that particular company. (Rachlinski, 2002)

Individuals who took risks in the market in the late 1990s and into the early 2000's soon found that there were many problems with the technology companies even though their financial statements looked good (Rachlinski, 2002). This is indicative of the fact that there is much more that needs to be understood about these issues and because of this it is quite possible that many of the rules that the SEC has created do not necessarily make any difference for investors (Rachlinski, 2002). There are many ways for individuals to get around these loopholes and create documents that are ethically misleading and sometimes even criminal based on the information that they contain (Rachlinski, 2002).

This was largely what was done when the market had such problems in 2000 and many of the companies begin to collapse (Rachlinski, 2002). It was not until individuals realized that these companies were not what they seemed that everyone tried to get out of the market (Rachlinski, 2002). When this happened all at once a great many individuals lost a lot of money (Rachlinski, 2002). The only ones who did well were the ones that sold right away before the stock had a chance to drop a great deal (Rachlinski, 2002).

Others lost everything and employees of those companies lost their pension plans, medical insurance, and many other things that they had come to rely on (Rachlinski, 2002). This was clearly extremely unethical but in and of itself was not a criminal matter (Pritchard, 1999). However, the fraud that many of these individuals engaged in when they made sure that the company looked to be much better on paper that actually was realistic was definitely a matter for the criminal justice system and the courts (Rachlinski, 2002).

It is still fascinating to many individuals that the SEC has not changed many rules since the fiasco in 2000 occurred (Tetlock, 2000). While it is true that the SEC has required CEOs to sign off on their corporations financial statements every year they have not done anything else significant to help protect investors (Tetlock, 2000). It would seem that disclosure appears to be the only thing that they are concerned with and some hypothesize that this comes somewhere between regulating conduct and not doing anything (Tetlock, 2000).

The truth is that if the SEC decided that they wanted to do something besides require disclosure that would have to look to Congress for authorization, and be able to justify the need for a regulatory tool that has not been created or utilized before would be very difficult and time-consuming, not to mention the amount of money that it would likely cost the taxpayers (Tetlock, 2000).

Another thing that the SEC has to deal with, and one of the things that was so important in 2000, is information about fraud and other problems that are going on with the market (Barberis, Huang, and Santos, 2001). The SEC receives all kinds of paperwork for various places and companies throughout each day, but there are many frauds that are being provided for investors to fall in to and the SEC must look at all of these issues, one at a time (Barberis, Huang, and Santos, 2001).

However, the SEC very rarely looks at the regulatory scheme that it has overall and analyzes how well it is doing (Barberis, Huang, and Santos, 2001). This is somewhat discouraging in light of the fact that so many individuals were hurt in the 2000 market crash (Barberis, Huang, and Santos, 2001). It would seem as though the SEC would be more interested in taking care of these individuals but it appears that little has been done. Some of this has to do with how well information is provided to the SEC and what type of questions are asked (Barberis, Huang, and Santos, 2001).

Much can be assumed about a question based on how it is asked of the SEC and when the SEC does not feel that a question is going to harm their own authority or the issues that are highly important to them it is likely that they will take little interest (Barberis, Huang, and Santos, 2001). Many of the areas where the SEC should be regulating securities show them instead having a polite indifference to the whole issue and this means that many investors will lose and their will be nothing that the SEC will do about this issue (Barberis, Huang, and Santos, 2001).

This happened in the 2000 through 2002 issue with the equities market as well. There were some individuals who clearly had to be prosecuted and the SEC stepped in and took care of this (Barberis, Huang, and Santos, 2001). However, for many of the small time individuals who caused trouble for employees and others the SEC did nothing and did not seem to feel that that particular area of securities regulations had anything to do with the issues that they needed to deal with (Barberis, Huang, and Santos, 2001).

However, the SEC did realize that it had to do something when the technology market began to collapse because there was so much information coming to them and so many allegations about various accounting problems that the SEC could simply not ignore something this large. There was a large concern about investors and the possibility that they would leave the market as well as the overseas market, and because of this the SEC and Congress both realized that new rules needed to be created (Barberis, Huang, and Santos, 2001).

Unless it relates to harm to investors or a threat to their authority, however, the SEC has largely remained behind the scenes and has spent very little time attempting to stop problems before they get started (Barberis, Huang, and Santos, 2001). It is sometimes uncertain and questionable how well this actually works based on the fact that the SEC often waits until there is a large problem before it steps up to do anything about it (Barberis, Huang, and Santos, 2001). It would appear that taking a more proactive approach to things and attempting to ensure that problems do not actually occur but are headed off before they have a chance to occur would be the best way to go (Barberis, Huang, and Santos, 2001).

However, the SEC has never worked that way and even though they did take care of some of the problems that occurred in 2000 it still appears that they have not done as much as they easily could have to protect investors (Barberis, Huang, and Santos, 2001). This is likely to work its way into the future as well and because of this it is quite possible that many of the individuals who are having trouble with problem companies now will continue to have problems well into the future of the market (Barberis, Huang, and Santos, 2001).

Whether another crash of the market occurs or not remains to be seen but it appears that little is being done by the SEC at this point to avoid this issue (Barberis, Huang, and Santos, 2001). Just asking for disclosure is apparently not enough and because of this the SEC is finding that more individuals are becoming concerned about various stocks and securities fraud (Barberis, Huang, and Santos, 2001). They must investigate more complaints against companies and questions about specific business practices then they ever had to before and because they are left to deal with this issue they have less time to consider other problems that may also be plaguing investors (Barberis, Huang, and Santos, 2001).

It is important to understand that information about this is necessary to look at not only the SEC in the problems that it has but the difficulties that are being faced by those who were caught up in the market crash that happened in 2000 (Barberis, Huang, and Santos, 2001). It is quite possible that it could have been prevented had the SEC acted early enough, but that is not a subject for debate any longer (Barberis, Huang, and Santos, 2001). It is something that has occurred and is now history. There is no way to go back and change it.

However, much of the unethical and criminal activity that occurred after that time can be avoided in the future if the SEC is willing to make further rulings and look at issues more seriously so as to avoid any further problems in this area (Barberis, Huang, and Santos, 2001). This is very important, and the chances of the market crashing again can be largely ruled out if the SEC is able to ensure that the rules have been changed enough to stop the kind of behavior that occurred back in 2000 when the equities market crashed.

CHAPTER THREE

METHODOLOGY

Approach

The approach to this study is relatively simple and uncomplicated. A review of the literature will provide the information necessary for an analysis and understanding of the issue. The study will therefore be approached from that idea of simplicity and the fact that all of the information necessary to make a good study of this issue has already been collected by other researchers. While they have collected the information, they have not always analyzed it in the same way that it will be analyzed in this study.

When approaching a study of this nature, it is important to look at the entire picture and make certain that a complete understanding of the issue exists so that there can be no issues later where problems might arise with something contained in the study. Much of this can be avoided by reviewing and analyzing the literature of others so that there is less chance of ending up with data that is unreliable and invalid.

Studies that are approached from the idea that the literature review will be the database for the study often have much to draw from, and while they do not present any new information, they do study previously published information in a new and interesting way. This helps to shed light on the issue and ensure that all parts of it are looked at.

Without looking at all parts of the literature, there is the possibility that something very important would be overlooked and this would cause valuable information to be ignored or possibly misinterpreted. There are also other ways to approach a study such as this, but many of them are not practical for this analysis. The reason being that many of them would involve surveying of individuals in the industry, and these people are not easily accessible. For this reason, as well as budget and time constraints, reviewing and analyzing the literature is the best and most practical approach to this study.

Data Gathering Method

In keeping with the above information, the data gathering method will be from the literature review. In order to gather the data that is truly important to the study, many different articles and documents were examined. The most prudent information, however, came from studies done into the SEC and what kinds of regulations they have regarding investors and the markets.

Apparently the SEC has specific ways that they handle various issues, and there are some rules that are somewhat unclear and can therefore be manipulated in such a way that they do not always stop people from committing unethical acts. Criminal acts, however, are not condoned for any reason, and therefore it cannot reasonably be said that the rules of the SEC were so unclear that they allowed for criminal activity.

Data that was gathered through the literature review allowed for many different issues to be considered and therefore helped the researcher to form more specific understandings of what types of activities may have occurred and why these activities happened the way that they did. Some had to do with the ways that investors attempted to get around the various rules and regulations that the SEC has, but others simply related to individuals who were desperate committing unethical and criminal acts in order to attempt to save much of what they stood to lose when the crash occurred.

Because of the method of data collection and the type of information collected, the study is qualitative in nature. In other words, it relies more heavily on perceptions and thoughts about the issue than it does on numbers and statistics. Statistics into this issue are not readily available, and so much happened in a relatively short period of time that it would be difficult for all of it to be condensed into the kind of statistical information that is usually used in quantitative studies. Qualitative analysis was the most realistic approach to this issue and the one that would also help to yield the most information to the researcher.

Database for the Study

The database for the study does not include anything but the literature that was reviewed. Most of that literature deals with the SEC and the rules and regulations that they create in an effort to stop illegal and unethical activities from occurring. Much of this occurs when individuals are making trades and when those same individuals realize the problems that they are facing and attempt to determine how best to avoid allowing these problems to get any larger.

This is a large concern for all that deal in this type of market, as problems can easily arise, and market fluctuations come from many different things. Because of this, much information needs to be analyzed for a study such as this. The best way that this information can be collected and analyzed is by looking at what the SEC has done and what it plans to do in the future to stop these types of problems from occurring again.

This creates a good database for information, because much of the literature that deals with the SEC also deals with the idea that the SEC has many rules and regulations that govern individuals who trade on various markets. This is important because the breaking of these rules in criminal and unethical ways is the focus of this study. Without a clear understanding of the rules that are being broken, it is more difficult to comprehend the significance of this and the possible thoughts that might have been had by those that chose to break these rules.

By providing a literature review and a database that deals with these rules, it is more easily understood what kinds of crimes were committed and their significance. By identifying and analyzing these types of crimes, determining whether crimes were actually committed during the 2000 to 2002 period becomes much easier. From the discussion of whether these crimes were committed, the study can then logically move to what types of crimes these were and what type of impact they had on the investors who committed them, their companies, and others, such as company employees.

Many of these employees were affected in adverse ways by so many of the technology companies experiencing problems, and this is certainly significant for the study at hand. The database that has been provided via the literature review gives an ideal example of the rules that were broken and the difficulties that this caused for many individuals.

Validity of the Study

Validity is very important to any study. Without validity, a study is largely pointless and the information that has been collected within that study is suspect. For purposes of this study, the data will largely be considered valid because it has already been collected by others. The data is therefore not something that the researcher has collected and has already been through the process of being screened and tested for validity by the original researchers of the studies that will be discussed and considered in the literature review.

Checking the information that was collected carefully to ensure that it is acceptable will be very important, as there is much that could skew results of various studies. However, by looking at the data collected from the literature review and ensuring that the limitations of that data were taken into consideration by the prior researcher, it will be much easier to determine the validity of the data for purposes of this research.

It is sometimes difficult to check the reliability and validity of a particular researcher's data simply from examining a study and looking at the limitations that were discussed by that researcher. Because of this, data that might be suspect will either be admitted from the study and literature review or qualified by the discussion of the limitations that the previous researcher found and the other potential limitations found by the researcher of the current study.

This is the only logical and thorough way to ensure that the information collected for the current study is reliable and valid, and without this assurance the whole study becomes suspect. A study that is done with invalid data does not provide any benefit for the researcher who conducted it, and also does not provide any benefit for researchers that might wish to utilize that study in the future as part of their ongoing research into a particular subject.

Due to this and other considerations, the data that is collected from the literature review will be carefully examined and qualified so that the data that has been presented in the literature review and analyzed in the following chapter can be considered valid by this researcher and by researchers that will come along after this study and wish to examine the same subject in the same basic manner.

Originality and Limitations of the Data

There are also originality and limitation issues with the data that will be used for this study. First, originality is virtually nonexistent in this particular study. The reason for this is that all of the data used has been collected by other researchers and will be utilized for this study after being examined for quality and validity.

The information provided to the researcher through the literature review will be seen as reliable and valid, but not as original. Original data would be data that had been collected by the research from specific subjects through surveys and other instruments. This would be the only way that data could be considered completely original and would be therefore much different in scope from what has been collected in the literature review. For reasons such as time and budget, as well as access to various individuals in this field, no original data will be obtained for this study.

Instead, the way that the data collected from the literature review will be looked at can be considered original. While much has been written on the subject discussed here, there are no specific studies dealing with exactly this particular issue. Because of this, an analysis of the data by this researcher will be original in that it will allow for a different type of study of the information and a different way to look at what was collected.

This will make the method of analysis original, and this will be significant, as this study will be the first of its kind to look at this particular issue in this specific way.

Just as there are concerns and discussions about originality, so to are there concerns about limitations that might affect the data for the study and therefore the analysis and conclusions about the information. Every study has at least one limitation of some kind, and because of this there are many concerns that must be raised in many studies.

With this study, the largest limitation is the fact that the data is not original. Because of this, the researcher is limited to the information collected by others and therefore cannot assure that all pertinent data has been collected. There is potential for a lack of information into areas that might be deemed important for the purposes of this study, and if no information into this area exists based on previous literature, there is no way to examine that particular issue.

This can be difficult for researchers due to the lack of knowledge about a specific area that deals with an issue under study. This is likely the largest limitation that can be found for a study such as this, although there are also limitations to studies that utilize original data, in that there are many ways that researcher bias and therefore skewed results can come into play.

Another limitation of this study is that the issue in question is rather localized, and how much criminal and unethical activity went on in this 2-year period is very hard to measure. This is largely due to the fact that some individuals who engaged in this behavior likely were not caught, and therefore the idea as to how much of a problem this was cannot really be measured with any type of accuracy.

The only things that can reliably be studied in an issue like this are whether criminal and unethical behavior occurred (as evidenced by arrests and so forth) and whether it appeared that the amount of this activity was greater than the amount of this activity that normally goes on in the equities market. It is quite likely that the criminal and unethical activities do not only occur after a crash has taken place, but rather are part of the basic issue of trade that involves so many different individuals all trying to make the most money that they can possibly make off of as little investment as possible.

Individuals that take this too seriously and have a great deal invested are often very despondent if something happens that stops them from making the kind of money that they believe they should be making. Because of this, there are large concerns about what some individuals will be willing to do, especially in times of market crises or downturns.

This is one of the main limitations of the study - that what goes on for many of these individuals is something that cannot be easily or readily measured, and therefore is very problematic when it comes to studies where the amount, type, and frequency of these criminal and unethical acts are called into question.

Even though the data is not original and limitations about the data do exist, this does not render the study invalid. The study will use a different way of looking at much of what has already been discovered by other researchers, and through doing this it will shed light on the issue at hand and whether it was actually as big as many individuals seemed to believe that it was. Naturally, it was very big for those that engaged in criminal activity and were caught, but there were many others that were affected by the poor business decisions made by those that they worked for. It is important not to forget the consequences that many of these individuals had to face when the companies that they worked for either held massive layoffs or closed altogether.

All studies must deal with various limitations, and this also is no reason to consider a study invalid. Without limitations a study would not have much to offer others, because life is full of limitations and therefore they are a natural part of all things. They must be treated as such and discussed within a study to render reliability and credibility to the study and to the researcher for realizing the limitations that will be faced during the course of a particular study.

Summary

The way that the methodology is designed for this study involves the use of the data that has been collected in the literature review. To use surveys or other instruments would be impractical and unrealistic given the nature of the study. Due to this, the literature review will provide the database for the study that will be conducted into criminal and unethical behavior in the equities market crash between 2000 and 2002. Tt is important to look at the rules that were being violated during this time.

For that, the SEC must be discussed and the types of rules and regulations that they have must be noted. This makes it much easier to understand what some of the problems are and why they are so significant where this study is concerned. Without knowledge of what the rules are, it becomes very difficult to understand their importance or even realize that they have been broken. This would be obvious with some rules, but others are rather delicate and may not be as significant from a criminal standpoint. These will not receive as much attention, and those that break these rules about ethical conduct likely have a better chance of avoiding difficulty than those that break the criminal rules.

By recognizing the importance of these rules, the significance of breaking them can be more easily understood and the limitations that the literature review has as a database will likely make much more sense. This is important, as a thorough understanding not just of the data but of the limitations of it and its validity is also vital to the comprehension of the study and what it means for those that deal in the market as investors. These investors must be very careful that their desperation at the idea of losing what they have invested does not overcome their moral and ethical understanding of what is fundamentally right and wrong.

Many investors lost everything between 2000 and 2002, and still others lost everything later on, through the government's realization of the criminal and unethical acts that they had committed. Either way, it caused much pain for many investors, but it would appear that those who remained honest and lost what they invested lost far less than those who engaged in criminal and unethical acts and therefore lost much more than mere money, which can always be replaced.

It is important for an understanding of the study to have the knowledge that the study is qualitative, and therefore relies more on basic information about the rules and how and why they were broken, rather than on the issues such as numbers and statistics that are virtually nonexistent for this particular type of issue.

There are no specific facts that indicate how many individuals who were in the market at that time took advantage of things and committed criminal or unethical acts. However, it appears to be clear that a significant amount of this did occur and it is important that it be examined in light of ensuring that it does not happen again when the market takes a downturn.

Without a better examination of this particular issue, there is too much chance of it occurring again in the future. Those who are not punished for the crimes and unethical behaviors that they commit often commit them again simply because they got away with them the first time.

Not all individuals have this opinion, naturally, and many would not do anything unethical in the market regardless of whether they had the chance. However, for those that would be willing to do so it is better that stronger rules and stiffer penalties be created so that this will not be an issue in the future.

There will always be some individuals who will make trouble when and where they can, and the equities market is no exception to this. This is significant because of what it says about human nature, but it is also important because there is much that can be learned from why individuals behave this way and what they are trying to accomplish.

Greed is apparently a factor but it seems that harming others or getting the upper hand is equally as interesting to most of these individuals.

CHAPTER FOUR

ANALYSIS OF THE DATA

Analyzing the data is quite often the most difficult part of any study, and this is certainly true of qualitative studies. With quantitative studies, there are specific facts and figures that are available to the researcher. These can be examined, charted, and dealt with easily. However, for qualitative studies the information collected in quite different and much more difficult to chart or graph in any way. Much of this has to do with the fact that qualitative studies often do not provide very many specifics in the way of amounts, statistics, and other numbers that might be significant.

However, qualitative analysis is very important in an issue such as this one, where many of the 'why's' and 'how's' are merely speculation on the part of this researcher and many others based on the available data. Fortunately, enough has been written in various ways about this topic that there is much to choose from in evaluating what makes good, reliable information and what does not.

The SEC and the rules and regulations that it has were the focus of this analysis not only because information about these things could readily be found, but also because there must be an understanding of the rules before the idea of breaking them makes sense. Without being aware of what the rules are, there is no understanding of how much is too much, or whether something that is not criminal might be considered ethically inappropriate by others that examine the issue.

In looking at the data from the literature review, however, it is easy to see that the SEC has a great many rules and regulations, but that not all of them are as easy to enforce as would be liked. Some of the rules are also rather vague and leave room for loopholes and misinterpretation that could lead to criminal and unethical behavior from those that are determined to be created with what the rules are. There are also those that will exhibit this type of behavior not from creativity about the rules but from the misguided opinion that they have the right to do things that other people do not, or from the idea that they will not be caught and punished.

An analysis of the data would indicate that the hypothesis was valid. Criminal and unethical activity did indeed take place after the 2000 equities market crash. Whether this was something new based on the crash, however, or whether it was something that had always taken place still largely remains undecided. It is generally assumed that this type of unsavory behavior at least takes place to some extent but that it was more pronounced after the market crash based on the idea that more individuals feared losing a great deal of what they had invested into the market.

Often when people feel this way there is a lot of fear expressed and they are very concerned about being unable to handle what has happened to them. Sometimes they panic and when they do they tend to deal with things in a way that they would not normally do. Because of this, many individuals dealt with serious problems when the equities market crashed in 2000, and most of these were individuals who had money in technology stocks. There was a large collapse of technology and is caused a great deal of pain for many investors.

It also caused a great deal of difficulty for those who were the heads of technology companies as these individuals often belonged in a criminal category as well. Many of these individuals embezzled money and misled individual investors as to how much money the company was actually making. Because of this, this allowed for their stock prices to soar and when it was known what they actually did and that they did not have the money that they claimed that they had, investors pulled out of the market very rapidly and many of the technology companies collapsed.

In addition to this collapse, many of these technology companies also had to deal with the fact that their CEOs and other head individuals were now charged with fraud and other problems which made the company basically bankrupt. Employees and investors had the worst times with this issue. Employees due to the fact that many of them lost their jobs, their pensions, their medical insurance, and other benefits that they were expecting to have.

Several of these individuals in many companies were quite near retirement age and it would have been very difficult for them to secure other jobs with the type of insurance and pensions that they already had. About the only way they could get this type of job again was to go to another technology company butt there were so many problems with these various companies that this was not something they wished to do either. Since this was a problem for so many employees, there was less sympathy for the investors then there might have been otherwise.

Many of these investors lost a great deal of money when technology stocks collapsed, but investors in this type of issue often have money in various other avenues as well and not all investors went broke based on the technology collapse. However, for investors that had put most or all of their money into technology stocks and other technology equity, it was a very difficult time in their lives. The criminal and unethical behavior came not only from investors who were trying their best to unload the investment that they had at a good price, but also from those who elevated the prices of their stocks and made their companies look better than they actually were in order to secure more investors and make a great deal of money.

Naturally, most of this money was lost in the technology stocks' collapsed, but this does not mean that individuals who had difficulties with this in the past would not invest in technology again. However, it does not look as though the technology companies will ever grow to the extent that they were in 2000, and this may be actually good news for investors and the activities that some of them engaged in.