Ethics in the Investment Industry (20 Marks)

A. Ethics play an important part in the business-world, and this is particularly true for the investment industry. You may often be placed in situations where you must make decisions where you have to consider the priorities of your clients, as well as your firm. Describe the process of effective ethical thinking that may help you in such situations.

[3 marks]

B. One tool that you may use in guiding your behaviour is the CFA Code of Ethics. Outline the main points of the Code of Ethics, and highlight how this differs from the Standards of Professional Conduct. [7 marks]

C. In 2009, Raj Rajaratnam was running Galleon Group, a successful hedge-fund, which made large profits by taking positions in the stocks of publically traded companies. Rajat Gupta was a senior director at Goldman Sachs, a major investment bank, and also served as a director on the board of a number of firms. In this role, Gupta had access to a range of private information relating to the financial performance of a number of companies, including IBM, Intel, and Goldman Sachs itself. Rajaratnam and Gupta were close friends having studied together at Wharton Business School, and had a number of business relationships.

On October 16, 2009, Rajaratnam was arrested. Evidence emerged that showed Gupta had been passing private information to Rajaratnam over a number of years. In particular, Gupta has passed on confidential information about a substantial purchase of Goldman Sachs preferred stock by Warren Buffet?s Berkshire Hathaway. Using this information, Rajaratnam had entered into trades and had been able to profit by at least $60 million. In May 2011, Rajaratnam was found guilty.

Carefully describe what Rajaratnam had done wrong from an ethical viewpoint, and propose an appropriate punishment. [10 marks]