Ethics Case Study of the Week: Generating Interest with Fictional Investors

By Gary Sarkissian posted 03-29-2021 08:00


CFA Institute’s Code of Ethics and Standards of Professional Conduct codify the ethical guidelines for the investment profession that are critical to maintaining the integrity of capital markets and investor trust.  Members, candidates, and even firms make a commitment to uphold these standards as they help elevate ethical decision-making universally around the globe.  

As investment professionals, we are certain to face important ethical decisions in our day-to-day activities.  Some scenarios we encounter will be straightforward, while others may be more complex.  No matter what circumstances we face, continuous learning remains imperative in an investment industry that continues to e volve with products undergoing innovation and a regulatory environment continuing to adapt. 

For that reason, each week we will feature a sample case from CFA Institute’s Ethics in Practice Casebook.  Each case is built upon a real-life example that may involve a regulatory matter or even a CFA Institute Professional Conduct investigation.  At the end of the case is a multiple-choice question that addresses the ethical nature of the actions taken in that case.  

This week’s case involves Standard II(B) Market Manipulation. 

Generating Interest with Fictional Investors
Ackerman is a securities contractor working to assist Superior Western Energy (SWE) list its shares on the Australian Security Exchange (ASX). SWE filed a prospectus for an offer of up to five million shares at $2 each to raise $10 million. The ASX listing rule applicable at the time required that entities seeking admission to the ASX must meet a “minimum spread requirement” of at least 300 shareholders with a minimum value holding to qualify for listing on the exchange. In their listing application, representatives of SWE informed ASX that the minimum spread requirement of 300 shareholders had been met. These disclosures included as shareholders 31 people or companies arranged by Ackerman. But none of the supposed shareholders were genuine buyers of SWE securities; Ackerman had provided false names and addresses for the investors. The SWE share offer raised more than $3.5 million, with more than 1.75 million shares being issued. SWE was admitted to the official list of the ASX, and its shares were quoted on that exchange. Over time, the price of SWE shares steadily increased, the company attracted hundreds of investors and shareholders, and early investors achieved an excellent investment return. Ackerman’s actions were  

A. unacceptable.
B. acceptable because SWE proved to be a strong company with excellent performance.
C. acceptable because no investors were harmed by a technical violation of ASX rules.
D. acceptable if SWE would have met the minimum spread requirement without the 31 fictitious investors claimed by Ackerman.

What do you think is the correct choice?  Click the “Analysis” button below to see the analysis for this case, and feel free to discuss in the comments below.  The completion of this case qualifies for 0.25 hour of Standards, Ethics, and Regulation (SER) credit

This case relates to CFA Institute Standard of Professional Conduct II(B): Market Manipulation, which prohibits CFA Institute members from engaging in practices that artificially inflate trading volume to mislead market participants. In this case, Ackerman engaged in information-based manipulation by falsely inflating the number of initial investors in the SWE securities. According to the Australian Securities and Investments Commission, the purpose of the minimum requirements for securities to be listed on the ASX is to demonstrate that there is sufficient investor interest in the company to justify its listing. This operates to ensure some level of liquidity at the time the company is initially listed and keeps poorer quality applicants that are not able to attract sufficient investor interest to meet the minimum spread requirement from being admitted to the ASX official list.

Falsifying the number of initial investors, therefore, goes beyond a technical violation of ASX rules and has substantive consequences. The fact that SWE ultimately proved to be a bona fide and solid investment does not mitigate Ackerman’s conduct. Even if SWE met the minimum spread requirement without the 31 invented investors, Ackerman’s misrepresentations still falsely pumped up the initial interest in SWE securities to circumvent regulatory requirements and drive interest in the investment. Choice A is the best answer.

This case is based on a 22 October 2018 Enforceable Undertaking by the Australian Securities and Investments Commission.

Image by Flash Alexander from Pixabay  

© 2019 CFA Institute. All rights reserved. You may copy and distribute this content, without modification and for non-commercial purposes, provided you attribute the content to CFA Institute and retain this copyright notice.  This case was written as a basis for discussion and is not prescriptive of how a business situation or professional conduct matter should or should not be handled or addressed. Certain characters mentioned are fictional to facilitate discussion, and any resemblance to actual persons is coincidental.