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Subject 1. Case facts
Patricia Cuff is the CFO and compliance officer for Super Selection Investment Advisors, a rapidly growing medium-size money manager registered with the U.S. SEC to manage both separate accounts and mutual funds. Super Selection has subscribed to CFA Institute's Code of Ethics and Standards of Professional Conduct. Patricia herself is also a CFA Institute member.
Karen Trader is a portfolio manager with Super Selection. Josey James, a friend of Trader's, is now the president of AMD, a rapidly growing local biotech company. During the past five years, James has provided Trader with information on attractive stocks in Trader's field-biotechnology-on which Trader capitalized for her Super Selection portfolios and her personal portfolio. In many cases, she has placed personal trades before trading for her clients because she was able to act more quickly on her personal trades than her Super Selection trades. Trader's personal brokerage statements had not been submitted to Cuff until recently.
Three years ago, James asked Trader to serve as an outside director for AMD, and despite AMD's uncertain prospects at the time, Trader eagerly accepted the offer. Because AMD was in shaky financial condition until recently, the company compensated its directors with stock options rather than cash payments. For the past several years, directors received options exercisable into 200,000 shares in AMD stock. AMD's shares were not traded anywhere, however, so this compensation was essentially worthless and Trader has not reported her relationship with AMD to Super Selection. This year, with AMD's sales setting records and earnings up, directors started receiving quarterly director fees of $5,000.
Several months ago, the AMD board voted to issue shares of stock to the public to raise needed cash. The market for initial public offerings (IPOs) was very hot, with valuations of biotech companies at record levels.
Shortly before the public offering date, valuations of biotech companies were falling rapidly. James called Trader to commit to purchasing a large amount of the AMD offering for her Super Selection accounts to provide enough support for the offering to proceed as planned.
Trader had previously decided that AMD was a questionable investment for her clients - but she changed her minds on the recommendation of James and when the IPO was effective, she placed the order for the separate accounts and the mutual funds that she managed.
Study notes from a previous year's CFA exam:
a. evaluate the practices and policies presented;
b. explain the appropriate action to take in response to conduct that violates the CFA Institute Code of Ethics and Standards of Professional Conduct.