Chris Martin, CFA, was attending a noon luncheon when he overheard two software executives talking about a common vendor, Datagen, about how wonderful they thought the company was, and about a rumor that a major brokerage firm was preparing to issue a strong buy recommendation on the stock. Martin returned to the office, checked a couple of online sources, and then placed an order to purchase Datagen in all of his discretionary portfolios. The orders were filled within an hour. Three days later, a brokerage house issued a strong buy recommendation and Datagen’s share price went up 20%. Martin then proceeded to gather data on the stock and prepared a report that he dated the day before the stock purchase.
Martin has:
A) violated the Standards by using the recommendation of another brokerage firm in his report.
B) violated the Standards by improper use of inside information.
C) violated the Standards by not having a reasonable basis for making the purchase of Datagen.
I’ll post the answer after a couple responses…作者: BC_MBA_student 时间: 2013-3-30 20:42
I would go with C i think.
Also violates Suitability doesnt he?作者: therecruit 时间: 2013-3-30 20:42
I would say C for sure.
The reason is he didn’t have a reasonable basis upon which he could justify his purchase of the stocks. The executives are talking about their own enthusiasm and rumors, it ain’t nonpublic material information.
This is a pretty easy question I think.作者: dirk01 时间: 2013-3-30 20:42
Nicely done!
The correct answer is C.
Standard V(A) requires members to have a reasonable and adequate basis for taking investment actions. Overhearing a conversation does not provide adequate basis. It is not improper to use overheard conversations that do not include inside information, nor is it improper to reference another firm’s report to substantiate adequate basis, if the other report is justified.
I agree that I think it would violate Suitability as well. Just because they are discretionary accounts, they still need to be suitable for each client.作者: Analyze_This 时间: 2013-3-30 20:42
I agree too, the key word is “all” of his discretionary portfolios, but still, they could all be suitable who knows.作者: Chuckrox 时间: 2013-3-30 20:42
I agree that C is correct, but I wonder if B isn’t the stronger answer. Martin did overhear material nonpublic information and acted upon on it, even it was only a rumor at the time.
To me, insider trading affects the integrity of the securities markets as a whole, and that might be the greater evil.
Robert A作者: jarobi04 时间: 2013-3-30 20:42
What you you have thought about this altered fact pattern:
Martin returned to the office, checked a couple of online sources, and then placed an order to purchase Datagen FOR HIS OWN ACCOUNT.
..and answer stem A was, “not committed a violation”?
devildog Wrote:
——————————————————-
> the info is not inside info. The fact that they
> both use the company is not MIO. The pertinent
> info was the rumor about the buy recommendation.
> Key word…RUMOR. Then all they say is he checked
> a couple of online sources and the next key word
> is ALL. He bought in ALL his discretionary
> portfolio. They try to distract you with the fact
> that the purchase worked out. Remember no
> investment is right for every portfolio.
>
> Now if it had said he went back to his office and
> thoroughly researched it online and then bought it
> for every portfolio for whom it was appropriate
> there would be no violation作者: anish 时间: 2013-3-30 20:42
Robert A Wrote:
——————————————————-
> What you you have thought about this altered fact
> pattern:
>
> Martin returned to the office, checked a couple of
> online sources, and then placed an order to
> purchase Datagen FOR HIS OWN ACCOUNT.
>
> ..and answer stem A was, “not committed a
> violation”?
There was a similar question to that somewhere. Basically all he is doing is buying for his own account based on a rumor. There is no rule against making personal investments without proper basis. The fact is that the is not a material inside fact. It had nothing to do with the business the two executives conduct with datagen. It was a rumor regarding the action of a brokerage.作者: Analti_Calte 时间: 2013-3-30 20:43
Wasn’t there a question somewhere about an analyst seeing two competitors shaking hands and then walking into a restaurant (or something) together, and then concluding that an important deal was imminent? The analyst traded on that information and it was thought to be material nonpublic information.
