What is Self-Dealing?
Self-dealing is an illegal activity that occurs when a person or entity with fiduciary duty puts his or her own interests ahead of a client's interests in a transaction.
How Does Self-Dealing Work?
Let's say John Doe owns 500,000 shares of Company XYZ. This is a considerable number of shares in the company, and the sale will likely send the price of the stock down a bit.
Jane Smith, John Doe's financial advisor, gets the sell order from John Doe. Jane Smith personally owns some Company XYZ shares and knows that John's order is going to make them worth less. To avoid the loss, she sells her shares first and then puts John's order through. Jane is self-dealing.
This isn't the only form of self-dealing. The idea is that the fiduciary puts his own interests in front of the client's interests. Sales of products in which the fiduciary owns a stake might count, as would buying a house that your real estate client intends to purchase. If you are a partner in a business, self-dealing can also mean not informing your partners that you exploited a business opportunity that should have gone to the business.
Why Does Self-Dealing Matter?
Self-dealing is illegal, and clients affected by self-dealing might sue. Accordingly, it is important to understand your obligations to clients if you are a trustee, lawyer, corporate officer, board member or a financial advisor.