LAW, ETHICS AND PROFESSIONAL STANDARDS

LAW, ETHICS AND PROFESSIONAL STANDARDS

Case Study – Investments
Introduction

Ms. Laura Smith is a 72-year old retired widow with no investment experience. Her neighbor introduced her to George Shady, a stockbroker with Guaranteed Returns Securities firm. Mr. George invited Ms. Laura and her 30-year old unmarried daughter to lunch to discuss his firm and solicit their business (i.e., to seek their business as a client). During their meeting, Mr. George indicated that he could guarantee Ms. Laura and her daughter a 10% annual return if they opened a brokerage account with his firm and let him manage the accounts.

Order Custom Essay: LAW, ETHICS AND PROFESSIONAL STANDARDS

Ms. Laura opened an account with Guaranteed Returns and transferred her life savings of $200,000 to the account. She specified in the account application that the account was nondiscretionary. This meant that Mr. George was prohibited from acquiring or selling any investments in her portfolio (i.e., a collection of stocks, bonds and other assets) without her permission. The account application also contained two instructions. First, she requested that Mr. George pursue a conservative investment strategy because she is “risk averse” (i.e., an investor that prefers to avoid risk) due to her age. Second, she requested that he use a “buy and hold” strategy for her account (i.e., an investment strategy where an investor buys securities and holds them for a long time) because she wanted to minimize the amount of sales commissions she would have to pay for trades in her account.

Ms. Laura’s daughter opened her account with $75,000. Her account application instructed Mr. George to pursue an aggressive investment strategy (i.e., to pursue high risk investments offering high potential returns) because she (Ms. Laura’s daughter) has a high risk tolerance (i.e., she can handle risky investments).

Order Custom Essay: LAW, ETHICS AND PROFESSIONAL STANDARDS

The Complaint

When Ms. Laura and her daughter reviewed their October statements from Guaranteed Returns, they immediately noticed three things that concerned them regarding the trading activity (i.e., buying and selling of securities) in Ms. Laura’s account. First, an excessive number of trades (i.e., securities bought and sold) in the account, which they believed was inconsistent with the instructions to use a buy and hold strategy. Second, Ms. Laura never approved any of the trades that were reflected on her statement. Third, most of the securities Mr. George bought and sold for both of their accounts were identical, even though their investment strategies were different. When Ms. Laura and her daughter contacted Mr. George to question the transactions, he insisted that the transactions were consisted with their instructions.

Ms. Laura and her daughter contacted you for advice and asked you to conduct an investigation. When you reviewed Ms. Laura’s account statement, you noticed two large transactions (a $50,000 purchase and a $25,000 purchase) to purchase stock in a start-up company (i.e., a new company) called Sahara Real Estate Company. Your investigation revealed that Mr. George’s sister is the CEO of Sahara Real Estate. Ms. Laura informed you that Mr. George never asked her for permission to purchase Sahara Real Estate’s stock and never mentioned that his sister was the CEO of the company.

During a meeting with Mr. George, Ms. Laura and her daughter, you specifically asked Mr. George why he never informed Ms. Laura that his sister is the owner of Sahara Real Estate and never obtained her permission to acquire Sahara’s stock. He replied that he simply forgot to contact Ms. Laura.

Order Custom Essay: LAW, ETHICS AND PROFESSIONAL STANDARDS

You also asked him why Ms. Laura’s file did not have a copy of any investment analysis he performed on Sahara Real Estate before he acquired the stock. He admitted that he did not perform any research on the company, but simply relied on a tip (i.e., advice or confidential information given by someone with inside knowledge) from his sister that Sahara is about to sign contracts with 2 major clients. At this point he refused to answer any more questions. Therefore, you filed a complaint with the securities regulatory agency.

The securities regulator agency is also investigating allegations of insider trading (i.e., illegal trading of a public company’s stock by individuals with access to nonpublic information about the company) at Guaranteed Returns. According to a report from a whistleblower, Mr. George, and the firm’s brokers and managers purchased shares in a company called Friendly Software Company two weeks before the company publicly disclosed plans to acquire its biggest competitor, Novel Software LLC. The whistleblower indicated that this was material non-public information (i.e., confidential information) provided by Mr. George’s fishing buddy, the company’s chief financial officer. Mr. George allegedly shared this information with his co-workers, and they sold their shares at a huge profit immediately after the merger was announced.

The records indicate that Mr. George purchased Friendly Software Company’s stock for Ms. Laura’s account 2 days before he and his co-workers sold their shares.

Discussion Questions

1. Analyze and discuss whether Mr. George has complied with the CFA Professional Standards of Conduct we have studied as follows:
a. What were Mr. George’s obligations under Professional Standard 3A, 3B, 3C and 3E when he opened the investment account for Ms. Laura and her daughter? Regarding the “suitability requirement” in Professional Standard 3C, what information should Mr. George have obtained to help him determine the suitability of the investments he made for Ms. Laura’s account?
b. Ms. Laura’s daughter does not believe the investment in Sahara Real Estate Company’s stock, or the excessive trades Mr. George made, were “suitable” for an elderly client (i.e., her mother) requesting the use of both a “buy and hold” and conservative investment strategy. Do you agree or disagree? Explain your answer.
c. Most of the securities Mr. George bought and sold for Ms. Laura and her daughter’s accounts were identical in spite of the differences in their investment strategies. Discuss whether this was appropriate given his obligations under the “suitability requirement.”
d. Discuss the requirements in Professional Standard 1? Indicate whether Mr. George was required to comply with these requirements, and if so, what he was required to do.
e. Discuss the requirements in Professional Standards 5 and 6. Discuss whether Mr. George complied with these requirements in connection with the purchase of Sahara Real Estate Company’s stock for Ms. Laura’s account.
f. Discuss Professional Standard 2A in connection with the securities regulatory agency’s investigation of Mr. George and his firm’s brokers and managers, in connection with their purchase and sale of Friendly Software Company’s stock. Also discuss whether Professional Standard 6 would apply to this transaction.
g. Mr. George guaranteed Ms. Laura and her daughter a 10% annual return on their investments if they opened a brokerage account with his firm and allowed him manage their investments. Discuss whether this statement was appropriate under the CFA Professional Standards of Conduct.

2. According to the proponents of the virtue ethics theory, there are certain character traits (i.e., virtues) that it is good for each person to possess. They believe that being good is more about “who we are” rather than “what we do.” Consequently, they believe these character traits should be used to evaluate whether an individual is behaving ethically. Plato identified four cardinal virtues: temperance, courage, wisdom and justice. Use these virtues to analyze and evaluate Mr. George’s conduct under the virtue ethics theory.

Order Custom Essay: LAW, ETHICS AND PROFESSIONAL STANDARDS

By admin in Essays on November 20, 2015