Kim Tang, CFA, is a consultant reviewing a hedge fund, CleanTech Research Fund. CleanTech invests in high-risk and volatile “clean technology” companies. CleanTech has adopted the CFA Institute Code of Ethics and Standards of Professional Conduct.
Tang examines the various forms of advertising used by CleanTech to attract new clients. In one of its advertising messages, CleanTech states, “We have a very experienced research team and are proud they are all CFA’s. Several of our managers serve as volunteers for CFA Institute. CFA Institute recognizes their expertise, and as a result, you can rely on our team for superior performance results.”
In reviewing CleanTech’s marketing brochure, Tang reads the following statements:
Statement 1The share prices of companies in the clean technology sector have increased recently because of the growing awareness of climate change issues and the rising cost of energy. There are many risks in this sector, some of which include new technology that is unproven. Also, the addition or removal of government incentives can make markets dysfunctional. Nevertheless, it is our opinion that returns in this area will continue to be above average for several years. In fact, our proprietary investment analytics software has determined that investments in green transportation companies are likely to double in value in the next six months based on a multiple factor regression analysis. Key risks associated with analytics software include the fact that they rely on historical data and that a set of unknown factors could interfere with the anticipated results. We will earn a 200% return over the next year on one of our solar power company investments based on sales projections we prepared, assuming that last year’s generous tax incentives stay in place.
Statement 2The CleanTech fund invests in publicly traded and highly liquid companies and is recommended only for investors who are able to assume a high level of risk. Last month, we invested in EnergyAlgae, a “green energy” company that partnered with a global energy firm early last year to create oil from algae. EnergyAlgae’s market capitalization quadrupled shortly after the partnership was formed. Recently, EnergyAlgae also patented a waste plastic-to-oil process that produces oil at less than $30 a barrel. One of the founders of CleanTech is on the board of EnergyAlgae, and information he gave us on the company’s patent process led us to purchase additional stock in EnergyAlgae before the patent became widely publicized with the release of the company’s semiannual financial report.* (*Information supporting the statements made in this communication is available upon request.)
When Tang asks CleanTech’s founders for supporting documents related to their investment in EnergyAlgae, she is told that this information is based on third-party research from Slar Brokerage (Slar), who maintains all necessary records. Tang completes a due diligence exercise on this research and learns that Slar has used sound assumptions and rigor in its analysis of EnergyAlgae. In particular, Tang learned that Slar used, at a minimum, the following attributes to form the basis of the recommendation: the company’s past three years of operational history, current stage of the industry’s business cycle, an annual research update, a historical financial analysis, and a one-year earnings forecast.
Tang also learns that the founders of CleanTech are majority shareholders of Slar, which underwrote the public offering of EnergyAlgae. Additionally, CleanTech’s analysts inform Tang that they did not need to look at the quality of Slar’s research because one of their former colleagues recently left CleanTech and established the research department at the brokerage firm.
In researching EnergyAlgae, Tang finds that potential customers and suppliers of EnergyAlgae are highly skeptical of the claims made regarding the company’s respective products. She also contacts several energy companies and is unable to locate anyone who has even heard of EnergyAlgae. When Tang reviews CleanTech’s trading activity in EnergyAlgae shares, she finds that CleanTech liquidated its position in EnergyAlgae soon after CleanTech’s portfolio managers presented positive views on EnergyAlgae in a number of media interviews. In addition, many of CleanTech’s employees also sold their shares in EnergyAlgae immediately after CleanTech sold its shares of the company. The share price of EnergyAlgae dropped dramatically after the stock sales made by CleanTech and its employees.
Question
The EnergyAlgae trades are least likely to have violated the CFA Institute Standards of Professional Conduct with regard to:
- the adverse and skeptical opinions of EnergyAlgae products.
- the order in which the shares were traded.
- share price distortion because of positive media presentations.
Solution
B is correct. The hedge fund had priority in trading the stock ahead of employees. The hedge fund is effectively the client. But it does not alleviate the stock price manipulation that was engaged in by the fund and its employees, a violation of Standard II(B)–Market Manipulation. In addition, there does not appear to be an adequate basis for recommending the stock (i.e., negative information on the company’s products from potential customers and suppliers), a violation of Standard V(A)–Diligence and Reasonable Basis.
A is incorrect because there does not appear to be an adequate basis for recommending the two stocks in violation of Standard V(A)–Diligence and Reasonable Basis.
C is incorrect because both the hedge fund and its employees have engaged in practices that distort prices in violation of Standard II(B)–Market Manipulation. This appears to be a classic “pump and dump” fraud where worthless stock is promoted to the public and once it reaches a certain price level the insiders who helped boost the share price sell off their shares, leaving other investors holding stock that has little or no value.
请问为什么hedge fund是client？hedge fund 不是invest在CleanTech的investor吗？
