Simple Ethics

Hi, hope you are not misled by the subject, Ethics is far from being simple in the CFA exam. Anyway i need some help. I would appreciate if someone could give a simple clear explanation of the relationship between “Material Non-Public information” and these words - “Tender offer” and “Misappropriated”. Thanks webtwister1

Looks like you faced the same problem I did on CFAI exam 1. I think they assume that the tender offer is private and is not yet disclosed to the public and trading on this could be material nonpublic info.

Tender offers are clearly stated to be material information, I suppose if it is not publicly relaeased it is Material Non-Public information. As for the word misappropriated I am not quite sure how this would be used in context on the exam.

TENDER-OFFER is surely a material info and it’s only know to a limited few (the bidders), so it should be material non-public info misappropriated - does it any way relate to plagiarism?

This is a relic. The old policy on trading on insider info was that you couldn’t trade on material inside info if you had a fiduciary duty or the info was misappropriated (which means stolen) (this mirrors US law) or the info related to tender offer (which was an odd addition, IMHO). Now they replaced all of that with the no trade on material non-public info.

Thanks, so it generally means that trading on misappropriated info and tender offer will lead to a violation of professional conduct.

Trading on misappropriated information in the US can get you thrown in jail so CFAI might be the least of your problems (The original misappropriater was O’Hagan who went to jail for 4 years). Trading on a tender offer with nonpublic info without having either a fiduciary duty or having misappropriated info will not get you into trouble with US law (probably) but will get you into trouble with CFAI (if you tell them and I can’t imagine why you would).

BTW - To test your studying - What things did O’Hagan do wrong? (From the Supreme Court decision) O’Hagan was a senior partner in the 275-lawyer Dorsey & Whitney law firm in Minneapolis, Minnesota, specializing in medical malpractice and securities law cases. From July 1988 through September 1988, Dorsey & Whitney was local counsel representing Grand Metropolitan PLC (Grand Met), a company based in London, England, regarding a contemplated tender offer for the common stock of the Pillsbury Company (Pillsbury), headquartered in Minneapolis. On August 18, 1988, O’Hagan began purchasing call options for Pillsbury stock, each option giving him the right to purchase 100 shares of Pillsbury stock by a certain date at a specified price. Later in August and in September, he made additional purchases of Pillsbury call options. By the end of September, O’Hagan owned 2,500 unexpired Pillsbury call options, more than any other individual investor in the world. O’Hagan also purchased 5,000 shares of Pillsbury common stock in September 1988. O’Hagan’s wholesale purchases of Pillsbury options represented a major shift from his previous avoidance of high risk option trading. The evidence showed O’Hagan mortgaged his home to purchase some of them. On October 4, 1988, Grand Met publicly announced its tender offer for Pillsbury stock. The price of Pillsbury stock immediately rose from $39 per share to almost $60 per share. Shortly after the announcement, O’Hagan exercised his options, buying Pillsbury stock at the lower option price, and then sold this stock at the higher market price generated by the tender offer. O’Hagan also sold the 5,000 shares of common stock that he had purchased in September at the lower preoffer price. O’Hagan realized a profit of over $4 million from these securities transactions.

I am guessing here… on a very long limb. II(A) Trading on MNPI II(B) Manipulating Capital market --> Information based manipulation and transaction based manipulation III(A) Loyalty, Prudence and Care - investing in shares prior to clients I(A) Knowledge of the law because of all of the above.

No. O’Hagan was not an AIMR member so he did not violate the Code of Conduct. If O’Hagan had been a CFA charterholder he would have known that exercising the options and selling the shares was blowing away the time value of his options and he should have just sold the options.

He was acting on a non-public information while he represented the Pillsburg Company. Basically he was acting on misappropriated information. So if he is not a CFA member then he would have been in violation of the law of the land.

Joey, Given that in the exam, they need not be AIMR or CFA members - just anyone could be the “key player” on an Ethics question, would the ones listed be the ones he violated?

I thought in ethics everyone is assumed to be CFA candidates or members unless otherwise stated?

I’m sorry being retarded, what’s misappropriated information? Thanks

My answer above was sort-of a joke although I know that the timing for jokes is not so good. I have impulse control issues. Anyway, the O’Hagan case is the poster child for misappropriated information. Prior to O’Hagan, you could only be convicted of insider trading if you had a fiduciary duty that you betrayed by insider trading. O’Hagan didn’t have a fiduciary duty but was convicted because the information he used belonged to someone else and he stole it and used it for his own benefit. The Supreme Court agreed that OHagan had no fiduciary duty but let his 4 yr prison sentence stand.