DOES OMAR’S PARTICIPATION IN THE ESOP MOST LIKELY VIOLATE ANY OF T...

6. Does Omar’s participation in the ESOP most likely violate any of the Standards of Professional

Conduct?

A. No

B. Yes, with regard to “Priority of Transactions”

C. Yes, with regard to “Conflicts of Stock Ownership”

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to

Kim Tang Case Scenario

Kim Tang, CFA, is a consultant reviewing a hedge fund, CleanTech Research Fund. CleanTech invests in

“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

all are 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 1: “The share prices of companies in the clean technology sector have increased recently due

to the growing awareness of climate change issues and the rising cost of energy. It is our opinion that

returns in this area will continue to be above average for several years. In fact, our proprietary

investment analysis 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. We will

earn a 200% return over the next year on one of our solar power company investments based upon

sales projections we prepared assuming last year’s generous tax incentives stay in place.”

Statement 2: “The 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 per barrel. One of the founders of CleanTech is on the board of EnergyAlgae, and his information 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 semi-annual 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 this information is based upon third-party research from Slar Brokerage (Slar),

who maintains all necessary records. Tang completes a due diligence exercise on Slar and learns that

Slar used, at a minimum, the following attributes to form the basis of the recommendation: the

company’s past 3 years of operational and financial history; current stage of the industry’s business

cycle; an annual research update; and a one-year earnings forecast.

Tang also learns that the founders of CleanTech are majority shareholders of Slar, who underwrote the

public offering of EnergyAlgae. Additionally, CleanTech’s analysts inform Tang 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 companies’ 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.