if one of the director’s wife tells her friend “John” (who is an asset mgr) about the phone conversation her husband had regarding one firm. Then John did intensive research on the firm and executive a trade. in this case, is there any violation of ethics? it seems John has used Mosaic theory, but didn’t he also have access to confidential deal information (which is non-public material info) via the director’s wife??? what’s your thoughts guys?
Why is that Directors wife talking to John, isn’t marriage sacred?
director cannot keep confidence of information. He has violated. Is John violating or just using mosaic information? I don’t know. He doesn’t sound right to me but … may be lack of reasonable basis V(a)? - sticky
If his conclusion was reached with due deligence and research and is completely based on his work rather than the non-public material information, he is not in violation. Otherwise he would be in violation of the Due Deligence as well as Non-Public Material Code. By the way, is the director in violation if he tells his wife or his mistress about this ? I can’t seem to figure out if divulging this info in a casual chat is a violation.
fsa-sucker Wrote: ------------------------------------------------------- > By the way, is the director in violation if he > tells his wife or his mistress about this ? > > I can’t seem to figure out if divulging this info > in a casual chat is a violation. if they use this information and act on it = violation or if they passed it onto someone who could act on it = violation
The Edge Wrote: ------------------------------------------------------- > or if they passed it onto someone who could act on > it = violation how do you determine whether he/she *could* act on it. If I passed it to my wife who passed it to her friend who passed it to somebody else who acted on it, am I in violation ?
fsa-sucker Wrote: ------------------------------------------------------- > If his conclusion was reached with due deligence > and research and is completely based on his work > rather than the non-public material information, > he is not in violation. > > Otherwise he would be in violation of the Due > Deligence as well as Non-Public Material Code. > > By the way, is the director in violation if he > tells his wife or his mistress about this ? > > I can’t seem to figure out if divulging this info > in a casual chat is a violation. but he had the advantage of the insider information from the director’s wife (i.e. regarding the potential M&A of that firm) John is not in violation by figuring out the value of the firm via Mosaic Theory, but he certainly had the non-public information on the firm (and it should be material if it’s potential M&A)
IF he acted solely on her tip then it would be insider, but since he did his due dilly and research to support the conclusion then its Mosaic. The director is in violation of Client Confidentiality, for sure.
If tip that she gave will lead to price movement(material info), then yes, otherwise it does not matter. the question does not have enough info to conclude anything. we are all guessing…
agree with krishna. point is that once you have MNPI, you’re tainted no matter how much “independent” research you then go and do. mosaic theory doesn’t trump having inside info if that’s what the point of the question is.
But he doesnt knwo that it was “insider” information I guess…
Good point BW, if I don’t know who this woman is, and she just tells me while we’re in line at Starbucks, hey heard that XYZ is a good buy. Then it’s not a violation because I did my research first.
but John is a friend of the Director’s wife, he should know… it’s hard to figure what why CFAI is trying to indicate.
sorry didn’t see that – yep, he’s busted.
There was a question like this on one of the sample exams… It seemed to indicate that the trade did not violate material nonpublic information, and that it was ok to trade based on the Mosiac theory. I was surprised.
I still think it’s material non-public info, don’t know why it’s not a violation by trading on it (although John did research on it)
fsa-sucker Wrote: ------------------------------------------------------- > If his conclusion was reached with due deligence > and research and is completely based on his work > rather than the non-public material information, > he is not in violation. I disagree… If the information is material non-public, even if he does his own due diligence and research, he cannot trade on that information.
ryanunsw Wrote: ------------------------------------------------------- > I still think it’s material non-public info, don’t > know why it’s not a violation by trading on it > (although John did research on it) Don’t you think it’s unfair that I can’t ethically trade a security *even after* I have done the due deligence and research, just because I unintentially overheard some material non-public information ? If the whole or partial basis of my trading decision is that information, I agree that it should be a violation. But, when I am manging a portfolio and my extensive research tells me I should save/make my clients some money by getting out of a position asap, I shouldn’t be etically forced to stick with that losing position because somebody talked about some material non-public information in my presence. Otherwise, I would be waiting till the information in made public, which may or mayn’t even happen, because that information may very well be untrue. I think the guidelines tell us that if the basis of your trading decision is the material non-public information, that’s when you are in trouble.
Also, lets not forget that the Example given in the Sample Exam, the Person did not trade immediately after hearing the news. She/He didnt act on the news and only decided to do research after reading something about it weeks later and did his/her own research on it. So NO its not a Violation. In the Above example, I guess it depends on the timing. If the Doctor heard the info, then took that info and did his/her own research and came up with a conclusion to buy, then I would say Yes in Violation b/c he/she oringinally acted on that information that was MNP. BUT in the Test Example, they waited a few weeks and they didnt act solely on her piece of info as I stated above. Also, Would the Doctor be in violation?? Can you be in violation if you never adhered to teh Code of Ethics, he’s a Doctor not an analyst??? That’s the real question 
cool, it’s pretty clear now. thanks all for the inputs