Legal Definitions - self-dealing

Self-dealing occurs when an individual who holds a position of trust and responsibility (known as a fiduciary duty) acts in a way that benefits themselves personally, rather than acting solely in the best interests of the person or organization they are obligated to serve. This involves a conflict of interest where the fiduciary prioritizes their own gain over the duties owed to others.

Here are some examples to illustrate self-dealing:

• Corporate Board Member Approves a Questionable Contract: Imagine a board member of a publicly traded company who is responsible for overseeing the company's operations and making decisions in its best interest. This board member votes to approve a contract for a new software system from a technology vendor. What the other board members don't know is that the board member secretly owns a significant stake in this technology vendor and will personally profit from the contract.

  Explanation: The board member has a fiduciary duty to the company and its shareholders to make decisions that benefit the company. By voting for a contract that personally enriches them through their hidden ownership, they are engaging in self-dealing because they are prioritizing their own financial gain over the company's best interests in securing the most advantageous software deal.

• Trustee Sells Estate Property to Themselves: A person is appointed as the trustee of a deceased relative's estate, which includes a valuable antique car collection. The trustee has a legal obligation to manage these assets for the benefit of the heirs (the beneficiaries of the trust). Instead of selling the collection on the open market to achieve the highest possible price for the heirs, the trustee arranges to purchase several of the most valuable cars for their own personal collection at a price significantly below their market value.

  Explanation: As a trustee, the individual has a fiduciary duty to manage the estate's assets for the sole benefit of the beneficiaries. By acquiring the cars for personal gain at a reduced price, they are engaging in self-dealing because they are putting their own financial interest ahead of their duty to maximize the estate's value for the heirs.

• Investment Advisor Recommends a High-Commission Product: A financial advisor has a client who wants to invest their retirement savings. The advisor recommends that the client invest a substantial portion of their funds into a particular type of annuity product. The advisor fails to disclose that they receive a significantly higher commission for selling this specific annuity compared to other, potentially more suitable, investment options that would better align with the client's long-term financial goals and risk tolerance.

  Explanation: The financial advisor has a fiduciary duty to provide advice that is solely in the client's best financial interest. By recommending an investment that yields a greater personal commission for the advisor, without full disclosure and consideration of the client's optimal strategy, they are engaging in self-dealing by prioritizing their own financial benefit over their client's welfare.