hspace=6 A civil fraud lawsuit recently filed by the U.S. Securities and Exchange Commission against the Goldman Sachs Group Inc. suggests the storied Wall St. firm played favorites by hawking a sophisticated investment security on behalf of a major hedge fund-without disclosing to investors that the same hedge fund not only designed the instrument but also had an interest in seeing it fail.

In fact, there may be nothing inherently wrong with a company showing a measure of favoritism to a major customer, say experts from Emory University and its Goizueta Business School.

For many firms, key account management and the development of strategic partnerships is a key source of a firm's competitive advantage, says Sandy Jap, a professor of marketing at Goizueta. In virtually every business-to-business industry, this is a standard approach and an understood practice.

But when it comes to securities related transactions, a different set of rules may apply.

Goldman Sachs, which also faces related investigations by other federal bodies, says it has done nothing wrong, expressing disappointment that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact.

Nonetheless, during a May 7 address to stockholders at the firm's annual meeting, embattled chief executive officer Lloyd Blankfein said the firm plans to establish a Business Standards Committee to examine Goldman Sachs' business principles and practices.

The question of favoritism in a business-to-business or even business-to-consumer environment is not always clear cut, says Paul Root Wolpe, a chaired professor of bioethics at Emory and director of the university's Center for Ethics. There are no alarms raised when an airline company favors one customer over another through promotions like frequent flier or other loyalty programs. For that matter, retailers may offer valued customers a first chance at a new product through a closed sale or other mechanism.

But Wolpe notes that certain ethical issues may arise when the selective release of information gives some parties a purchasing or other advantage. In general, these ethical issues would come into play when we're talking about information that is not generally available to all the players, Wolpe says, but is instead controlled by the provider or providers. In that case, selectively releasing this restricted information could give an unfair advantage to the recipients. While the finance industry may be first to come to mind [regarding early disclosure and other issues], it's not necessarily exclusive to the stock market or other finance-related segments.

In fact, from an ethical standpoint, the issues can become particularly muddled when favoritism takes place in a non-finance setting, Wolpe continues.

Let's say a company advertises the availability of a product at a low price as a way to attract new customers, he says. Let's further assume that it's all aboveboard, and that the customers will get the product that's advertised, eliminating the 'bait and switch' tactic that's patently unfair, not to mention potentially illegal.

Everything's fine, says Wolpe, until the concept of scarcity is introduced.

When a popular product is sold at a below-market price, there's likely to be limits on the availability, he notes. That's where ethical issues may arise. At what point does the advertising campaign become unfair? When only one product is available at the advertised price? When 1,000 are available? What will the 1001st customer say about that? The challenge is that there is generally no 'bright line' distinguishing fair practices from unfair ones in situations like these. It may come down to a judgment call on the part of the responsible authorities or other officials.

In practice, he adds, ethics regulations appear to target securities and other finance transactions more often than other activity. He believes this is because people will always be tempted by money, and the finance segment is among the most remunerative of all activities.

As a result, Wolpe notes, regulations aimed at countering incentives to act in an unethical manner are created.

In May, for example, Goldman Sachs Execution & Clearing LP agreed to pay a total $450,000 fine to the New York Stock Exchange regulatory unit and the SEC to settle allegations that the Goldman Sachs unit had engaged in improper short selling activities. Goldman Sachs did not admit or deny any wrongdoing.

But government officials need to beware of over-regulating the companies and people that are within their purview, Wolpe cautions. You don't want to lose innovation. Achieving a good balance between regulation and innovation is difficult at best, but perhaps one way to approach the issue is to look at how the incentives are structured and try to adapt them to encourage behavior that is both profitable and ethical.

The challenge in regulating finance is that the medium itself is fluid and resists regulation, yet it's simply too vital to be ignored, according to Jagdish Sheth, a corporate strategist and chaired professor of marketing at Goizueta.

In some segments, the decision about regulation rests with the cost and pricing mechanisms, he says. Thus, although the 1936 Robinson-Patman Act appears to require sellers to sell to everyone at the same price, it also contains a number of exceptions to that blanket prohibition.

The primary exception is one that makes allowances for differences in the cost of manufacture, sale, or delivery resulting from differences in the seller's costs of manufacture, delivery or sale to a customer, Sheth explains. The act also permits price differences that arise from changing conditions, such as the deterioration of perishable goods, the obsolescence of seasonal goods and other circumstances.

But finance related activities generally don't fall under those exceptions, Sheth says.

Money is the lifeblood of an economy, and because of this it's more regulated than medical products or defense-related activities, he notes. It's one of the exceptions to the free-market process. But as the Bernie Madoff [Ponzi scheme] incident demonstrated, money and finance are central to our existence. If we were talking about something like groceries, it would be different.

It may be apparent that the SEC and other agencies aren't backing away from tackling ethical issues as they relate to finance, says Wolpe, but it's difficult to discern if more or fewer companies are taking an ethical approach to their activities on their own initiative.

It could simply be that agencies are being more aggressive, he noted. There's always a lot more attention focused on ethics in the aftermath of a scandal, like Enron or Bernard Madoff, he said. Ethics in finance is a lot like flood insurance. Many people don't pay attention to it until after they've suffered a disaster.