Ethics Case Studies

1. Syyark Case Outline

The main facts of the Syyark case are as follows:

• Syyark, CFA, a private client adviser for Gueoe Bank, manages a globally diversified portfolio for client accounts. Syyark also advises clients on their outside holdings, thereby developing strong relationships with them.
• Syyark starts research into cryptocurrencies and realizes that competitive pressures make mining established digital currencies very difficult. Syyark settles on Meerine, a newer cryptocurrency. To limit his risk of being wrong, he recommends Meerine to a few of his smallest clients with an initial recommended allocation of 1% of portfolio.
• After attending several conferences, Syyark starts mining Meerine using his home computer without informing his employer.
• Syyark realizes that the trading volume is low and volatility high for Meerine but is confident about its prospects. Meerine price appreciates since his 1% recommendation. Syyark then recommended a 3% portfolio allocation to Meerine to all clients.
• In subsequent client review meetings, Syyark shares the performance of Meerine, its low correlation with stocks and bonds, and discloses his mining activity. Syyark offers to sell Meerine out of his own account to the firm’s larger clients.

Case Results

Standard III(B) Duties to Clients: Fair Dealing All clients should be treated fairly when taking investment actions and offering advice. Offering different levels of service is not a violation as long as it does not disadvantage a client group and is disclosed.

Violations of Standard III(B):

• It is not acceptable for Syyark to fill orders of larger clients from his personal account.

Actions required to prevent these violations:

• Collect orders from all clients and fill the orders (if suitable) pro rata or not offer to sell to anybody from his personal account.

Standard III(C) Duties to Clients: Suitability Investment actions on behalf of the client and investment advice provided to a client must be consistent with client’s goals and constraints.

Violations of Standard III(C):

• Even though Syyark has evaluated the risk reduction benefit of Meerine, blanket 3% allocation may not be suitable for every client. The initial 1% allocation recommendation to the smallest client was driven by using those clients as “guinea pigs” (if things don’t work out, Syyark’s and the bank’s reputations would be less tarnished) and not based on suitability for those clients.

Actions required to prevent these violations:

• Properly assess the client’s circumstances (including goals and constraints) to determine for which client an investment in Meerine is appropriate and, if so, what an appropriate level of investment should be for that client.

Standard IV(B) Duties to Employers: Additional Compensation Arrangements

Cryptocurrencies compete with banks for transaction completion services. Syyark’s mining of Meerine (even on his own computer) might conflict with Gueoe Bank’s interest.

Violations of Standard IV(B):

• Failing to inform the employer before engaging in mining activities.

Actions required to prevent these violations:

• Syyark should disclose to a supervisor or compliance officer of his intent to mine Meerine, what his potential earnings would be from this activity, and obtain a written permission before mining.

Standard V(A) Investment Analysis, Recommendations, and Actions: Diligence and Reasonable Basis Even though Syyark has researched Meerine, this initial recommendation to the smallest clients is not grounded in reasonable basis.

Violations of Standard V(A):

• Syyark’s evaluation of cryptocurrencies and Meerine in particular was not thorough.

Actions required to prevent these violations:

• Syyark should document his research into Meerine, the drivers of its value, and clients for which it would be suitable.

Standard VI(A) Conflicts of Interest: Avoid or Disclose Conflicts Syyark must avoid or disclose all conflicts of interest that could reasonably be expected to impair his independence and objectivity.

Violations of Standard VI(A):

• Syyark recommending an investment with limited liquidity which he holds in his personal account would reasonably be construed as a conflict of interest. Not disclosing this conflict would be a violation of Standard VI(A). Syyark only reveals his mining activities in client meetings after his 3% recommendation is made to all clients.

Actions required to prevent these violations:

• Syyark should disclose the conflict created by his recommendation of Meerine to his clients and his employer which he is mining and currently holds in his personal portfolio.

2. Agarway Case Outline

The main facts of the Agarway case are as follows:

• Agarway, CFA, recently joined CrowdWisdom as VP of due diligence. CrowdWisdom is a young, online crowdfunding company that matches venture capital investors with startups seeking capital. Fee paying applicants that satisfy CrowdWisdom’s due diligence would be listed on their platform and made available to all the investors that are members of the platform.
• The founders of CrowdWisdom want to grow rapidly and want to recruit the customers of startups as potential member investors on their platform. Additionally, they created an investment club comprising those members that were very active investors on the platform. Members of the investment club received a market intelligence report in addition to generally available applicant information.
• Agarway’s due diligence process includes several screens that he has successfully tested at his previous job, where he personally invested in several startups. These screens include size of the startup’s potential market, accounting policies, interviews with company executives, etc.
• One of the most promising companies that passed Agarway’s screen is Deko, an IT startup with impressive founders, attractive prospects, and a unique product. Deko’s target customer base is pre teens and teenagers. The company’s strategy calls for soliciting investment from customers via emails.
• Emails specify that the investors have to be adults over the age of 18.
• Over time, Agarway’s stack of applications to be reviewed grows over 300 and the founders are pressuring to have 10% acceptance rate. Agarway explains that there are time constraints in reviewing applications. Founders also recommend that two specific applicants that they met at a conference be accepted.

Case Results

Standard I(A) Professionalism: Knowledge of the Law

• Members and candidates should understand and comply with all applicable laws and regulations.

Violations of Standard I(A):

• It may not be legal in many jurisdictions to solicit investments from teenagers even if the solicitations specify that it is for adults only. Additionally, it may be illegal in many jurisdictions to collect information about minors without the permission of their parents. Sharing of information is further governed by various privacy laws that need to be carefully evaluated.

Actions required to prevent these violations:

• Agarway needs to ensure that Deko is in compliance with all applicable laws and regulations.

Standard VI(A) Conflicts of Interest: Disclosure

• Members and candidates are required to avoid or disclose all conflicts of interest that could reasonably be expected to impair their independence and objectivity.

Violations of Standard VI(A):

• Preferential access of market intelligence to members of the investment club may disadvantage other investors.
• Agarway’s personal investments may be competing with potential startup applicants creating a conflict of interest.

Actions required to prevent these violations:

• Agarway’s personal investments that compete with prospects as well as the preferential access to market intelligence to members of the investment club need to be disclosed to all investors.

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