A Brief Overview of the Investment Industry
Securities Laws and Regulations
Investment Ethics Are Easier Said Than Done
Four Fundamental Principles of Investment Ethics
Costs and Benefits of Being Unethical
Conclusion–Developing an Ethical Consciousness
Appendix– Financial Market Regulatory Agencies
CHAPTER 2– Fiduciary Duty of Investment Professionals– The Ethical Treatment of the Client Introduction– What is A Fiduciary?
Agency Versus Fiduciary Relationships
The Role of Laws, Regulations, and Professional Standards
The Importance of Confidentiality
Conflicts in Finding the Right Investments
Conflicts in Trade Management– Best Execution
Conflicts in Trade Management– Soft Dollars
Identification and Fair Treatment of Clients
Conclusion–Disclose! Disclose! Disclose!
Appendix– Professional Codes of Ethics
CHAPTER 3 –
Ethical Reporting of Investment Performance
Introduction to Ethics in Reporting Performance
Calculating Return: Predicting Future Performance or Measuring Performance for Current Clients?
Ethical Reporting of Risk Measures
Management Fees and Other Costs That Can Be Hidden
Time Periods Used to Estimate Historical Risk & Return Performance
Other Ways to Distort Historical Performance
Reporting Performance to Attract New Clients– Cherry Picking Accounts
Hidden Risks: Leverage, Short–Selling, Liquidity
Special Considerations with Valuing Securities that Don t Trade
Conclusion– The Crystal Ball
Appendix– Review of Investments Basics
CHAPTER 4–Ethical Use of Information Introduction– Information and The Search for Alpha
Trading On Inside Information
Trading on Trading by Insiders
Direct Communication with Corporations
Investment Banking and Chinese Walls
High Speed Flash Trading
Mutual Funds And Information Advantages Arising From Stale Prices
Conclusion– Information And Fairness
CHAPTER 5–Analyst Integrity Introduction– Analysts and Their Ethical Obligations
Investment Recommendations– Pickers
Buy Side and Sell Side Analysts– Who pays for the research?
Behavioral Finance and Analyst Ethics
Star Analysts– Overconfidence and Regret Aversion
Herding –The Influence of Other Analysts
Other Behavioral Pitfalls
Originality of Ideas
Other Analyst Conflicts
Conflicts with Employers
Conclusion– Be Aware!
PART II– Ethical Security Analysis CHAPTER 6–Investing in Companies with Ethical Accounting Practices Introduction– Reported Accounting Performance– Healthy Cynicism
The Source of Accounting Distortions–Accruals
Discretionary and Non–Discretionary Accruals
Managers Incentives to Manage Earnings
Cookie Jar Reserves and Big Baths
Aggressive Revenue Recognition
SPE s and Hidden Debt
Quality of Earnings
Earnings Smoothing: Is It Ethical?
Conclusion– Cash Versus Accruals– Be Skeptical!
CHAPTER 7–Investing in Companies with Good Corporate Governance Practices Introduction–Corporate Governance and its Importance to Ethical Analysts
Countrywide Financial Corporation– A Case of Weak Corporate Governance and Unethical Business Practices
The Role of the Board– An Overview
Who Makes a Good Director?
Effective Board Structure
Director Compensation and Shareholdings
The Nominating Process, Voting Rights, and Potential Conflicts
Executive Compensation– Structure and Incentives
Option Grant Abuses
Golden Parachutes, Golden Hand–cuffs, Golden Coffins
Horizon Problems And The Firm s Long–Run Profitability
Shareholders Rights and The Takeover Market
Conclusion– Shareholder s Rights and Conflicts
Appendix– Review of Stock Options
CHAPTER 8–Socially Responsible Investing Introduction– Directing Financial Capital to Benefit Society
Positive and Negative Screens
Socially Responsible Mutual Funds
Performance– Can You Do Well By Doing Good?
The Special Role of Pension Funds, University Endowments, and Foundations
Community Investing and Micro Finance Lending
Conclusion– Obstacles To Doing Well While Doing Good
CHAPTER 9–Cases Case #1– UBS and Morgan Stanley– An Elaborate Insider Trading Scheme
Case #2– Emulex and Mark Jakob– Market Manipulation with False Information
Case #3– Fidelity Traders and Gifts from Jefferies– Soliciting Brokerage from Traders
Case #4– Heartland Advisors and Bond Funds– Misrepresentation of Bond Values
Case #5– A.G. Edwards and Variable Annuities– An Inappropriate Investment
Case #6– Charles Hintz and Sanford Bernstein– Analysts Conflicts with Personal Holdings
Case #7– Nicholas Cosmo and Agape World Inc .– A Ponzi Scheme
Case #8– Former CEO of NYSE s, Grasso s, Pay Package
Case #9 Nick Leeson and Barings Bank– Rogue Trader
Case #10– Kellogg s Matched and Washed Trades– Tax Avoidance or Market Manipulation?
Case # 11– Qwest Communications International – Accounting Fraud and Overstated Revenues
Case #12– Refco– Misrepresentation and Hidden Debt
Case #13– Salomon Brothers and the Treasury Market– Cornering the Market
Case #14– Merrill Lynch and the Internet Boom– Analysts Conflicts
Case #15– John Mangan and Short Selling –Inside Trading
Case #16– Merrill Lynch and Bank of America Merger– Bonuses Paid to Merrill Employees –Excessive Compensation?
Case #17– Canary Capital Partners LLC– Mutual Fund Abuses
Case #18– Jérôme Kerviel and Société Générale– Rogue Trader
Case #19– WorldCom– Capitalizing Operating Expenses, an Unethical Accounting Practice
Case #20– The Squawk Box– Front Running
Case #21– Morgan Stanley– Brokerage Commissions and Brokerage Abuses
Case #22– Brian Hunter and Amaranth Advisors–Market manipulation of Natural Gas?
Case #23– The Bayou Group– False Reporting
Case #24– Morgan Stanley– Analyst s Coverage and Investment Banking Business
Case #25– Bernie Madoff– The Largest Ponzi Scheme in History?
Case #26 – Enron– A Case of Extreme Hubris
Case #27– UnitedHealth– Back Dating Stock Options
Case #28– First Cash Financial Services– Pay Day Loans and Return
Case #29 – Johnson & Johnson and the Tylenol Scare– Did Recall Hurt or Help Shareholders?
Case #30– Infrastructure Funds– An SRI Investment?