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) a violation of the Standard concerning use of material nonpublic information. C) not in violation of the Code and Standards.
I think the answer is B. I remember this question coming up in my practice and Fox’s knowledge of the recommendation being bogus is considered material nonpublic information.
I would say B as well. No one else knows that the recco is bogus.
correct answer is B. There are following things that make me think about the question 1)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. (- doesn’t seems like investor take it seriously. Since it is posted as prank) 2) Several days later, he observes an investment recommendation, posted on the site, to buy Gresham, Inc.- (This makes the info is public) 3)has learned how to determine if the quotes being attributed to Gerber are actually valid-( This seems like his personal skill, If he know it is bogus why will he think that stock is good to short, might be through his analysis but definitely not because info is bogus) 4)e-mails Gerber to inform him of the bogus recommendation. Gerber immediately issues a rebuttal. I feel like Gerber is in violation. Since he immediately issues a rebuttal without any due diligence. but didn’t get how Fox is. Is that about how he knows it is bogus or sending e-mail to Gerber ? Q-bank says following 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. There is no reference given for past so not sure how it came in the picture Sorry for the long post.
Par I think what you are missing is the implication that stock previously rose as a result of Gerber’s recommendation, which is why it falls 14% when it becomes known that the recommendation is false. Comments on your points: 1) Investors are taking it seriously because once it is known that the quote is false the stock falls, implying that it previously rose based on Gerber’s recommendation - which was fake. 2) Yes, the info is public, but it’s phony info. 3) Personal skill? Hardly - Fox runs and maintains the site, so he clearly has inside info on the source of the quote. He thinks the stock is a good short because he knows once the truth is out (bogus quote) that people will sell because they bought on bad information. 4) Why would Gerber need to do any due dilligence? He knows he did not make the recommendation so he issues a statement to that affect. He isn’t saying the stock sucks, he isn’t saying it is a good buy, he is saying that he did not make a recommendation that was attributed to him.
Thanks Chi. Your Ans really cleared the doubt