Question 1 - 8026

In August 2005, the following events occurred related to Aggregate Opportunities, Inc.:

• Aug. 8: The Wall Street Journal reported that Aggregate Opportunities had inflated its 2004 earnings due to questionable accounting practices. The story was based on interviews with unnamed sources within Aggregate and its auditor, Millennium Partners. On that day the stock fell 42 percent to $12.50 from $21.55.

• Aug. 10: At 9 a.m., Aggregate revealed in a conference call to analysts a restatement of earnings for the previous three fiscal years that almost completely erased the reported net income for fiscal years 2002, 2003, and 2004. Aggregate痴 chief financial officer personally selected the small group of analysts participating in this call. Company officers said the restatement resulted from questionable accounting practices for off-balance sheet limited partnerships. At 1 p.m., the company issued a news release containing the information provided in the conference call. By the end of the trading day the stock had fallen 74 percent to $3.25.

• Aug. 11: At 10 a.m., Aggregate痴 Chief Financial Officer Buster Lockhart, CFA, publicly announced his resignation, and the Securities and Exchange Commission said it was pursuing an investigation.

During July and August of 2005, the following actions were taken:

• July 20: Michael Cho, CFA, a highly respected analyst with 25 years of experience covering Aggregate痴 industry, had spent several days reading Aggregate痴 10-K and 10-Q documents and other analysis published by some of his competitors at major brokerage houses. Based on his reading and conversations with Aggregate management concerning nonmaterial, nonpublic information, Cho concluded that Aggregate had inflated its earnings. On July 20, Cho issued a detailed research report to his clients and concluded that Aggregate should be sold. He subsequently participated in the Aug. 10 conference call, although it only confirmed what he had already detailed in his July research report.

• Aug. 2: Equity analyst Harold Black, a CFA charterholder, received from his brother information that Aggregate might restate its earnings. Black痴 brother is a senior partner at Millennium Partners. Based on this information, Black immediately prepared a new research report that advised his clients to sell Aggregate, but did not liquidate his personal holdings in the company.

• Aug. 4: Bob Watkins, a CFA Level II candidate and portfolio manager, was golfing at his club. Approaching the third tee, he heard the chief executive officer and chief financial officer of Aggregate discussing company finances. Concealing himself behind a tree, Watkins overheard them discussing the upcoming Wall Street Journal article and the earnings restatement. Based on this conversation, he immediately sold all Aggregate holdings in his clients・portfolios. Later that day, Watkins told his friend Juan Martinez, CFA, what he learned about Aggregate and how he learned it. Martinez, a subscriber to Cho痴 research, then read Cho痴 report on Aggregate. Immediately after finishing Cho痴 report, Martinez sold the fund痴 entire stake in Aggregate. Watkins and Martinez were not participants in the Aug. 10 conference call.

• Aug. 8: Barb Henderson, a CFA charterholder, read the Wall Street Journal article in the morning and immediately issued a sell recommendation for Aggregate. On Aug. 10, she participated in the conference call and heard the details of the earnings restatement.

• Aug. 10: Lisa Sanders, CFA, participated in the Aggregate conference call. At 10 a.m., she changed her recommendation on Aggregate from hold to sell and informed all of her clients. At 1 p.m., Sanders sold Aggregate from her personal account.

Part 1)
In issuing a sell recommendation for Aggregate, Henderson:

Part 2)
In selling his clients' holdings in Aggregate, Watkins:

Part 3)
In advising his clients to sell Aggregate, Black:

Part 4)
After changing her recommendation on Aggregate, Sanders:

Part 5)
In selling his fund's stake in Aggregate, Martinez:

Part 6)
Which statement about violations of the Code and Standards is TRUE?

Question

Part 1)
The correct answer was C) violated none of the Standards.

The information published in the Wall Street Journal was public information, so Henderson did not violate Standard II(A). While Henderson did not do any independent research, the Journal is a credible source, and even the hint of an accounting scandal can be enough to sink a stock. As such, using the story to justify a downgrade did not violate Standard V(A) or Standard V(B).

Part 2)
The correct answer was C) violated Standard II(A): Material Nonpublic Information by taking investment action.

Watkins violated the CFA Institute Standards because the information was both material and nonpublic. It does not matter if the information was not misappropriated, not received in a breach of duty or not related to a tender offer. Watkins still cannot trade or cause others to trade. CFA candidates are indeed subject to the CFA Institute Standards. While the misappropriated information did not involve a tender offer, Watkins’ use of it still violated the Standards simply because it was material nonpublic information.

Part 3)
The correct answer was A) did not violate Standard I(B): Independence and Objectivity, but his supervisor violated Standard IV(C): Responsibilities of Supervisors.

Black’s conduct does not violate Standard I(B), because a reasonable person would not call his independence into question, even though his ethics are suspect. Black’s supervisor should have asked Black where he got the information before the research report was circulated, and the failure to do so means that the supervisor violated Standard IV(C). Black is also clearly in violation of Standard II(A): Material Nonpublic Information, because he would clearly have known that the information received from his Brother was both material and nonpublic. However, Standard II(A) is not one of the choices. Black’s failure to follow his own advice does not violate Standard III(B). Ignoring all of the other details, knowledge that an earnings restatement is possible could certainly be considered a reasonable basis to dump a stock, so Black did not violate Standard V(A). Standard VI(A) pertains only when a relationship would impair investment judgment, and that is not the case here.

Part 4)
The correct answer was C) violated Standard II(A): Material Nonpublic Information by taking investment action based on information not accessible to the public.

The way in which Aggregate handled the conference call was an instance of selective dissemination, Members and Candidates must be aware that disclosure to selected analysts is not necessarily public disclosure. Thus, until the material information is made public, Sanders cannot trade or cause others to trade. Once the information is made public, Sanders must disseminate the information to her clients first, and give them adequate time to act on the recommendation before trading for her own account. In the absence of knowledge of any company policy with stricter requirements, 3 hours is probably sufficient, and we cannot assume she violated Standard VI(B). Standard III(B) does not require equal dissemination of information but rather fair dissemination. Nothing in the question indicated that Sanders disseminated the information unfairly.
   

Part 5)
The correct answer was A) violated Standard II(A): Material Nonpublic Information by using information obtained from Watkins.

Martinez was aware of how Watkins obtained the information; therefore, Martinez violated II(A) by trading on material nonpublic information. Martinez has no fiduciary duty to Watkins, and as such did not violate Standard III(A). It would be difficult to argue that Cho’s thorough research is not sufficient reason to trade Aggregate stock, so Martinez did not violate Standard V(A).
   

Part 6)
Your answer: B was correct!

Aggregate’s selective disclosure did violate the fair-dealing Standard, and while Black violated a number of Standards, his brother’s fiduciary duty cannot be imposed on him. Black did not violate the fiduciary-duties Standard. While Cho did not violate the insider-trading standard because he came to his conclusions through the mosaic method, Watkins certainly did because he misappropriated the information. Martinez violated the Standard on material nonpublic information. Henderson did not violate the reasonable-basis Standard. Sanders did violate the insider-trading Standard.

[此贴子已经被作者于2007-5-13 16:41:35编辑过]