Good ethics question

D

deep2002

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Fred Dumbo, CFA, has recently started working for LPC, a trading company. One of his first duties in the new position has been to execute the purchase of a block of East Last Industries, a firm that is a major client of his former employer. During his prior employment, Dumbo was informed directly by East Last's CEO that the company's sales have experienced a sudden drop and are about 40% below current analyst estimates. The information has not yet been announced. When reviewing his current employer's research report on East Last Industries, Dumbo realizes that the buy recommendation is based on sales forecasts that he knows are wrong. Which of the following actions would be the most appropriate for Dumbo to take according to CFA Institute Standards of Professional Conduct?

A) Annonymously post the drop in sales information on a public internet forum to achieve public dissemination of the information and inform his supervisor of his posting.

B) Contact the CEO and urge him to make the information public and make the trade if he refuses.

C) Share the information only with his immediate supervisor and compliance officer.

D) Request that the firm place East Last's stocks on a restricted list and refuse to make any buy or sell trades for the company's stock.
 
B?

Btw, nice name- Fred Dumbo.

We have a dept. head with the surname Wisdom. He has none though :P



Edited 1 time(s). Last edit at Wednesday, May 30, 2007 at 11:37PM by ruhi22.
 
we were just talking about the issue of asking the company to make this info public. I think in this case, he needs to let his supervisor know since the firm is a major client.
 
IMO, Wouldn't that be acting upon the material non public information? Dumbo needs to behave as if he doesn't know it.
 
ruhi22 Wrote:
-------------------------------------------------------
> B?
>
> Btw, nice name- Fred Dumbo.
>
> We have a dept. head with the surname Wisdom. He
> has none though :P

Read the very end of B...you think he should go ahead and trade on inside info if the president refuses to divulge it?
 
I think he is not trading on the insider info. If he refuses to trade, then he would be acting on the material non public information.

If he didn't know about this, wouldn't he have bought the stock?
 
great point dubbs... also, there are circumstances when you can disclose to supervisor and compliance... i this is one of them
 
nope, Ruhi22 was correct, its B but I would have gone with C and I dont know why Schweser would say its B.
 
YAAAYYYY!!!!!!!!

Can you please post the official explanation and the Question ID? Thanks



Edited 1 time(s). Last edit at Wednesday, May 30, 2007 at 11:48PM by ruhi22.
 
I hate the questions that says he should urge the ceo to bring it public. I specifically remember the standards saying to through your compliance department when in doubt. Why is this an exception, if he has doubts he should be able to review it through his supervisor and compliance department.

so does that mean that whenever you have the option, its always better to urge the person and if they refuse, to trade on it anyway than reviewing through your compliance department?



Edited 1 time(s). Last edit at Wednesday, May 30, 2007 at 11:52PM by deep2002.
 
good thinking ruhi. it's bedtime for me 12:00 et. Can't interrupt good sleep patterns. Talk to you all tomorrow.
 
i will post the official iafter im off the phone with the wife
 
Read C. carefully. It doesn't say that the CEO refused to divulge it publicly. It only says that he should share the info. with the supervisor and the compliance officer. Had it said that the CEO refused to divulge it, then C would be correct.

Can I have the question ID please?
 
Thats a great point. After having just read B above it I was still assuming he had talked with the CEO.

I'm dead on this thing.
 
The offical Response:
Standard II (A) Material Nonpublic Information requires that members and candidates who possess material nonpublic information not act or cause others to act on the information. Putting the stock on a restricted list, refusing the trade, or sharing the information with his supervisor, are all potential violations of this standard since they involve acting or causing others to act on the nonpublic information he possesses. Dean should seek to have East Last Industries make the information public. If public dissemination is not made, he is not allowed to act on the information. Refusing to make the trade he was instructed to make would be acting. On the information in this case, the obligation here is to integrity of financial markets.
 
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