Ethics Doozy

Lets see what you guys think of this one… Lisa Pierce, CFA, has been researching Lander Manufacturing for the past three weeks. She likes the company’s history of fulfilling its contracts on time and within budget. She learns from the uncle of a maintenance worker at Lander’s headquarters that a group of well-dressed individuals arrived at headquarters in a lime green-colored limousine. Pierce knows from publicly available information that Gilbert Controls needs a large supply of specialized motors in its domestic division. She also knows that the executive officers of Gilbert usually travel in a lime green limousine. Pierce concludes that it is very likely that Gilbert will offer a large contract to Lander. Based on this development and her prior research Pierce would like to acquire Lander Manufacturing shares for her client accounts. Pierce should: A) not acquire the shares until after she has contacted Lander’s management and encouraged them to publicly announce information about the Gilbert Controls contract. B) proceed to acquire the shares. C) not acquire the shares until after she has contacted Lander’s management and encouraged them to publicly announce information about the Gilbert Controls contract. She should also wait until Lander has made the announcement and the public has had time to react to it and then make the acquisition. D) not acquire the shares because she possesses material nonpublic information.

B, mosaic theory.

Isn’t she using material non-public info though? Even though she does use some public information, the fact that Gilbert is meeting with Lander is non-public and has a potentially material impact on the share prices of the companies involved.

Hmmmm, D b/c she wants to acquire shares based on her research AND inside information. B if she was going to buy the shares anyway, no matter if she heard the inside info or not.

yeah, B. She did her own work. Normally, they would ask whether or not she did enough due diligence here (she seems to have rushed into a conclusion soon), but b/c I don’t like the other choices and ETHICS IS NORMALLY COUNTERINTUITIVE, I pick B

The answer is B, btw

B, mosaic all the way…they could be talking about anything at the meeting, she just inferred what it was from other information…maybe they were discussing what color to repaint their limo?

I think that C could make sense too, assuming that you feel she possesses material non-public info. Although the waiting until the public has time to react is not true

willispierre Wrote: ------------------------------------------------------- > The answer is B, btw yup, ethics is COUNTERINTUITIVE. remember that, I have trained myself to do 18 Ethics question in 10 minutes so that game day gets me to FSA section ASAP. 20-25% of test = FSA. focus on that.

I’m pretty confident with FSA as I have an MBA in Finance/Accounting. Some of these ethics questions are just pissing me off…

B - The key is she pieced together the information. If she heard from her contact the guys in the ugly limosine had placed an order the story would be different because it would be material non-public information. Just having the guys show up is immaterial unless there is other news leaked with it.

B, mosiac as others have written

B - Seems like nonmaterial nonpublic information to me. People in suits and riding in a limo is not material by itself. I do however think that this would be a violation of diligence and reasonable basis since she is basically speculating.

rlange - I agree with the speculation, but would not a large portion of mosiac be speculation unless the information becomes public?

well it does state “Based on this development and her prior research”, so it is not speculating in my opinion, she has reasonable basis due to her own research.

No, not always. You can take comments made by the company, look at income statements, balance sheets, etc., talk to other companies in the industry to find trends and piece it all toghter and make assumptions. I do agree that it will still be speculation to a degree, but if you put together hard data along with trends and comments, it is more solid.

what about reasonable basis? seeing a lime green limo and making that conclusion would violate that standard

vbcfa - it is kind of fuzzy but it seems that after three weeks of research she was able to come to a reasonable basis.