Investment Ethics

PREFACE
PART I- Ethical Behavior
CHAPTER 1- Introduction: The Case for Investment Ethics
 Introduction-The Investment Industry- A Legacy of Scandals and a Need for Ethics
 A Brief Overview of the Investment Industry
 Securities Laws and Regulations
 Investment Ethics Are Easier Said Than Done
 Ethics Basics
 Four Fundamental Principles of Investment Ethics
 Costs and Benefits of Being Unethical
 Conclusion-Developing an Ethical Consciousness
 Appendix- Financial Market Regulatory Agencies
CHAPTER 2- Fiduciary Duty of Investment Professionals- The Ethical Treatment of the Client
 Introduction- What is A Fiduciary?
 Agency Versus Fiduciary Relationships
 The Role of Laws, Regulations, and Professional Standards
 The Importance of Confidentiality
 Conflicts in Finding the Right Investments
 Conflicts in Trade Management- Best Execution
 Conflicts in Trade Management- Soft Dollars
 Identification and Fair Treatment of Clients
 Conclusion-Disclose! Disclose! Disclose!
 Appendix- Professional Codes of Ethics
CHAPTER 3-Ethical Reporting of Investment Performance
 Introduction to Ethics in Reporting Performance
 Calculating Return: Predicting Future Performance or Measuring Performance for Current Clients?
 Ethical Reporting of Risk Measures
 Management Fees and Other Costs That Can Be Hidden
 Time Periods Used to Estimate Historical Risk & Return Performance
 Other Ways to Distort Historical Performance
 Reporting Performance to Attract New Clients- Cherry Picking Accounts
 Hidden Risks: Leverage, Short-Selling, Liquidity
 Special Considerations with Valuing Securities that Don’t Trade
 Conclusion- The Crystal Ball
 Appendix- Review of Investments Basics
CHAPTER 4-Ethical Use of Information
 Introduction- Information and The Search for Alpha
 Information Asymmetry
 Private Information-Talent
 Trading On Inside Information
 Trading on Trading by Insiders
 Influential Publications
 Direct Communication with Corporations
 Investment Banking and Chinese Walls
 Mosaic Theory
 Front Running
 High Speed “Flash” Trading
 Mutual Funds And Information Advantages Arising From Stale Prices
 Market Manipulation
 Conclusion- Information And Fairness
CHAPTER 5-Analyst Integrity
 Introduction- Analysts and Their Ethical Obligations
 Investment Recommendations-“Pickers”
 Forecasters
 Buy Side and Sell Side Analysts- Who pays for the research?
 Behavioral Finance and Analyst Ethics
 Star Analysts- Overconfidence and Regret Aversion
 Herding -The Influence of Other Analysts
 Other Behavioral Pitfalls
 Originality of Ideas
 Other Analyst Conflicts
 Conflicts with Employers
 Conclusion- Be Aware!
PART II- Ethical Security Analysis
CHAPTER 6-Investing in Companies with Ethical Accounting Practices
 Introduction- Reported Accounting Performance- Healthy Cynicism
 The Source of Accounting Distortions-Accruals
 Discretionary and Non-Discretionary Accruals
 Managers’ Incentives to Manage Earnings
 “Cookie Jar” Reserves and “Big Baths”
 Aggressive Revenue Recognition
 SPE’s and Hidden Debt
 Quality of Earnings
 Earnings Smoothing:  Is It Ethical?
 Conclusion- Cash Versus Accruals- Be Skeptical!
CHAPTER 7-Investing in Companies with Good Corporate Governance Practices
 Introduction-Corporate Governance and its Importance to Ethical Analysts
 Countrywide Financial Corporation- A Case of Weak Corporate Governance and Unethical Business Practices
 The Role of the Board- An Overview
 Who Makes a Good Director?
 Effective Board Structure
 Director Compensation and Shareholdings
 The Nominating Process, Voting Rights, and Potential Conflicts
 Executive Compensation- Structure and Incentives
 Option Grant Abuses
 Golden Parachutes, Golden Hand-cuffs, Golden Coffins
 Horizon Problems And The Firm’s Long-Run Profitability
 Shareholders’ Rights and The Takeover Market
 Conclusion- Shareholder’s Rights and Conflicts
 Appendix- Review of Stock Options
CHAPTER 8-Socially Responsible Investing
 Introduction- Directing Financial Capital to Benefit Society
 Stakeholder Theory
 Positive and Negative Screens
 Socially Responsible Mutual Funds
 Performance- Can You Do Well By Doing Good?
 Shareholder Advocacy
 Divestment
 The Special Role of Pension Funds, University Endowments, and Foundations
 Community Investing  and Micro Finance Lending
 Islamic Finance
 Conclusion- Obstacles To Doing Well While Doing Good
CHAPTER 9-Cases
 Case #1- UBS and Morgan Stanley- An Elaborate Insider Trading Scheme
 Case #2- Emulex and Mark Jakob- Market Manipulation with False Information
 Case #3- Fidelity Traders and Gifts from Jefferies- Soliciting Brokerage from Traders
 Case #4- Heartland Advisors and Bond Funds- Misrepresentation of Bond Values
 Case #5- A.G. Edwards and Variable Annuities- An Inappropriate Investment
 Case #6- Charles Hintz and Sanford Bernstein- Analysts’ Conflicts with Personal Holdings
 Case #7- Nicholas Cosmo and Agape World Inc.- A Ponzi Scheme
 Case #8- Former CEO of NYSE’s, Grasso’s,  Pay Package
 Case #9 Nick Leeson and Barings Bank- Rogue Trader
 Case #10- Kellogg’s “Matched” and “Washed” Trades- Tax Avoidance or Market Manipulation?
 Case # 11- Qwest Communications International - Accounting Fraud and Overstated Revenues
 Case #12- Refco- Misrepresentation and Hidden Debt
 Case #13- Salomon Brothers and the Treasury Market- Cornering the Market
 Case #14- Merrill Lynch and the Internet Boom- Analysts’ Conflicts
 Case #15- John Mangan and Short Selling -Inside Trading
 Case #16- Merrill Lynch and Bank of America Merger- Bonuses Paid to Merrill Employees -Excessive Compensation?
 Case #17- Canary Capital Partners LLC- Mutual Fund Abuses
 Case #18- Jérôme Kerviel and Société Générale-  Rogue Trader
 Case #19- WorldCom- Capitalizing Operating Expenses, an Unethical  Accounting Practice
 Case #20- The Squawk Box- Front Running
 Case #21- Morgan Stanley- Brokerage Commissions and Brokerage Abuses
 Case #22- Brian Hunter and Amaranth Advisors-Market manipulation of Natural Gas?
 Case #23- The Bayou Group- False Reporting
 Case #24- Morgan Stanley- Analyst’s Coverage and Investment Banking Business
 Case #25- Bernie Madoff- The Largest Ponzi Scheme in History?
 Case #26 - Enron- A Case of Extreme Hubris
 Case #27- UnitedHealth- Back Dating Stock Options
 Case #28- First Cash Financial Services- Pay Day Loans and Return
 Case #29 - Johnson & Johnson and the Tylenol Scare- Did Recall Hurt or Help Shareholders?
 Case #30- Infrastructure Funds- An SRI Investment?
GLOSSARY