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Up0
The question being:
Q. Sue Seros, CFA, is reviewing the performance of Arithamatics, Inc., which she has placed in several client accounts. She believes a recent purchase in its price may present a buying opportunity and that industry conditions suggest Arithmatics may be an attractive acquisition for a larger company. She has occasion to talk to her podiatrist, who mentions Arithmatics and tells her that he believes Arithmatics is a takeover target and that she should buy more. Seros subsequently increases her clients’ holdings in Arithmatics and tells her clients that it is an attractive takeover prospect at current prices. Seros has:
A. not violated the Standards of Practice
B. violated the Standard on material nonpublic information
C. violated the Standard on diligence and reasonable basisSchweser’s answer was A because: While actual knowledge of an upcoming takeover offer is considered material and nonpublic information, the source here, her podiatrist, is not a reliable source so there is no violation of Standard II(A). The information given indicates that Seros has researched the stock and knows it well, so there is no apparent violation of Standard V(A).
I disagree with this because i think C was the answer. Seros may have conducted research and believed the company to be a good acquisition. But the fact that she “subsequently” increased her client holdings after her conversation with the podiatrist clearly implies that it wasn’t on a diligent and reasonable basis. And I don’t see sufficient information that would imply that Seros researched the stock well.
Will be more than happy to hear everyone’s side on this and prove me wrong.
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Up3
@SidMenon I think when you are tackling an ethic question it helps to have an “outsider” perspective. If you would have to prove that she violated the standard how would you prove it? She has the research and supporting evidence that she believed it was a good stock and believes that it is an attractive company for acquisition. Your charge against her would be thrown out of court.
Interesting way to look at it @diya!
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Up1
Agree with A @Sidmenon actually.
I do take your point about your interpretation of the question that it seems that Sue decided to take action after speaking to her podiatrist.
She believes a recent purchase in its price may present a buying opportunity and that industry conditions suggest Arithmatics may be an attractive acquisition for a larger company.
This statement indicates that she did her research properly/objectively and arrived at that conclusion herself.
But the subsequent statements did not say something along the lines of “as a result of this discussion with podiatrist” – then I think your answer C is right.
B was out of the question unless the podiatrist somehow is related to Arithamatics and may have insider info.
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Up1
Agree that it’s A. To be able to identify a violation it should be a clear action on Sue’s part. E.g. if they said based on Sue’s research she decided NOT to act on it, but then visited her psychic (or podiatrist) and he tells her to buy, then she acts – that’s a violation because it is clear that she isn’t acting on the research but rumours.
Hope that helps.
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Up1
@SidMenon I think when you are tackling an ethic question it helps to have an “outsider” perspective. If you would have to prove that she violated the standard how would you prove it? She has the research and supporting evidence that she believed it was a good stock and believes that it is an attractive company for acquisition. Your charge against her would be thrown out of court.
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