In researching EnergyAlgae, Tang finds that potential customers and suppliers of EnergyAlgae are highly skeptical of the claims made regarding the companies’ respective products. She also contacts several energy companies and is unable to locate anyone who has even heard of EnergyAlgae. When Tang reviews CleanTech’s trading activity in EnergyAlgae shares, she finds that CleanTech liquidated its position in EnergyAlgae soon after CleanTech’s portfolio managers presented positive views on EnergyAlgae in a number of media interviews. In addition, many of CleanTech’s employees also sold their shares in EnergyAlgae immediately after CleanTech sold its shares of the company. The share price of EnergyAlgae dropped dramatically after the stock sales made by CleanTech and its employees.
6.) The EnergyAlgae trades are least likely to have violated the CFA Institute Standards of Professional Conduct with regard to: A. share price distortion because of positive media presentations. B. the order in which the shares were traded. C. the adverse and skeptical opinions of EnergyAlgae products.
Answer = B “Guidance for Standards I–VII,” CFA Institute Standard II(B): Market Manipulation, Standard V(A): Diligence and Reasonable Basis The hedge fund had priority in trading the stock ahead of employees. The hedge fund is effectively the client. But it does not alleviate the stock price manipulation that was engaged in by the fund and its employees, a violation of Standard II(B): Market Manipulation. In addition, there does not appear to be an adequate basis for recommending the stock (i.e., negative information on the company’s products from potential customers and suppliers), a violation of Standard V(A): Diligence and Reasonable Basis.
It’s against CFAI policies to have adverse and skeptical opinions of companies? I agree w/ Audacious that C certainly seems to be the answer. This is the type of question that is borderline unfair though not uncommon in the Ethics realm.
adding insult to injury, C mentioned adverse and skeptical opinions of the company’s “PRODUCTS”. I would understand if it was about the company’s damned financials, management, … But about products? If I say that Apple produces crappy products in comparison to Samsung, am i violating something (apart of millennials doctrine)?. McDonald’s are the king of junk food, still they’re doing great. Taco Bill are successful in selling shoes polish as ground beef in their tacos. They’re doing fine (flooded toilets are at their historical peak).
B) no violation - the trading order indicates the traders DID NOT front run the company
C) violation - poor due dilligence process - shouldve avoided investing in this company given the dubious reputation on the market (customers/suppliers dont trust the products & no other companies in the industry have heard of the company)
Not to belabor a stupid ethics question, but I don’t see your point on the explanation for C. The question is regarding violations related to the sell trades of the energyalgae stock, not the initial investment in the company. Although a due diligence violation may have occurred initially, that would have happened long before they liquidated their position and wouldn’t be relevant to this question. I could be wrong though.
The questions states: “The EnergyAlgae trades are least likely to have violated the CFA Institute Standards of Professional Conduct with regard to.”
It doesnt specify the “sell” trades so it’s unfair to assume that we are only looking at the sale as the analyst was “reviewing the trading activities”, and it’s unlikely that it was a suitble investment before then all of a sudden nobody even knows anything about the company. There’s nothing wrong with (B) so it’s least likely to have violated the Codes.
If you were the clients, would you be more upset about traders selling stocks after you or the overall investment in the company?
But I agree with all of you, dubious question at best. I doubt we will see this kind of bs on the exam.
I’m just being brought back to the idea that we are here to uphold the integrity of the financial markets. Does buying a stock for a company, through your due diligence indicating it may possibly not even exist, uphold that integrity? Sure, the hedge fund can sell before the employees, but there could clearly be a violation because the vignette clearly makes it out to seem like this is a hedge fund profiting off of a pump and dump. The CFA3 is about the bigger picture, so wouldn’t this be the right way to think about it? With such skeptical opinions (and I’m a professional who sells short frequently) I think I can see what the CFAI was getting at here. On a standalone basis we can argue over C, but when you read “the order in which the shares were traded” you have to immediately say to yourself, “What? There’s no violation there.” and move on.
On B, the vignette says that employees sold their stocks immediately ('immédiatement in the cursing language) after the company. What happened to blackout periods?