Question

Linda, a manager and a currency trader for United Traders, has specific instructions from the CEO not to take a position on any currency in excess of $1 million. Linda sees what she believes to be a sure thing and takes a $20 million position. Unfortunately, the transaction goes bad and costs United $60 million. Does Linda have any liability to United?

1) Yes, because Linda violated specific instructions and is, therefore, liable for the company's loss.
2) No, Linda's actions are a normal market practice.
3) Yes, because Linda engaged in insider trading.
4) No, Linda is protected by the business judgment rule.

Answer 1

Linda is liable for United's $60 million loss because she exceeded her authority to engage in trades, violating the CEO's explicit instructions not to take positions on any currency in excess of $1 million.

Step-by-step explanation:

In the scenario presented, Linda, the manager and currency trader at United Traders, took a position that directly violated the CEO's instructions not to engage in trades exceeding $1 million. She took a $20 million position, which went badly, resulting in a $60 million loss for the company. In this case, Linda does indeed have liability to United, primarily because she ignored explicit directives from the company's chief executive officer. Option 1 is the correct one: Yes, because Linda violated specific instructions and is, therefore, liable for the company's loss. This action is far from normal market practice and does not fall under the protection of the business judgment rule, which typically protects officers and directors of a company when they act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner they reasonably believe to be in the best interests of the company.