bmaggie

Klaus Gerber, CFA, is a regular contributor to the Internet site WizeGuy. This past week Gerber has been incorrectly quoted as recommending that investors buy shares in Bradford, Inc. He is unaware that this message has been placed on the site as the quote was placed as a prank by an unknown source. This is the third time this has happened over the past month.

Fritz Fox, CFA, maintains and updates the WizeGuy site and has learned how to determine if the quotes being attributed to Gerber are actually valid. Several days later, he observes an investment recommendation, posted on the site, to buy Gresham, Inc. The investment recommendation is purported to be from Gerber, but Fox actually knows it to be bogus. He immediately sells 1,000 Gresham short and e-mails Gerber to inform him of the bogus recommendation. Gerber immediately issues a rebuttal, and Gresham falls by 14%. Fox's action is:

A) a violation of the Standard concerning fiduciary duties.

B) not in violation of the Code and Standards.

C) a violation of the Standard concerning use of material nonpublic information.

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Even though the information is false, this fact is known only to Fox and is thus nonpublic information. Since such recommendations have in the past had a significant affect on the price of the security in question, the information is clearly material. Fox is in violation of Standard II(A) Material Nonpublic Information.

bmaggie

While working on her report, Jean Paul, CFA, learns from her friend in the investment banking department that the company she is analyzing can expect a tender offer very soon. Concerning this conclusion, Paul can:

A) trade on it, because it is public information.

B) not trade on it because it is material nonpublic information.

C) trade on it, because she figured it out by herself.

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According to Standard II(A), Material Nonpublic Information, an analyst is prohibited from trading on information that is both material and nonpublic.

bmaggie

The mosaic theory is the idea that an analyst can:

A) make recommendations or trade based on several pieces of public or nonpublic information, each piece by itself being nonmaterial, but when compiled the information becomes material.

B) make investment recommendations on the basis of several pieces of nonpublic information as long as the aggregate information remains nonmaterial.

C) base his recommendations on nonpublic material information only for the clients of the company, but not for the general public.

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The mosaic theory permits an analyst to make recommendations based upon several pieces of public or nonmaterial information, even though the complied result is both material and nonpublic.

bmaggie

Insider trading can be defined as information that is:

A) material and public.

B) nonmaterial and nonpublic.

C) material and nonpublic.

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Information is material if it would be important to the investor in their investment making decision. Information is nonpublic if it is not yet available to the public.