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Ethics Case Study of the Week: Spending Some Coin—While Making Some Coin!

By Gary Sarkissian posted 01-10-2022 08:00

  
CFA Institute’s Code of Ethics and Standards of Professional Conduct outline 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 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 the circumstances, continuous learning remains imperative in an evolving investment industry and an adapting regulatory environment. 

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

This week’s case involves Standard VI(C) Disclosure of Conflicts – Referral Fees.


Spending Some Coin—While Making Some Coin!
Juniper is a globally famous professional boxer living in Las Vegas, Nevada, with approximately 21 million Instagram followers, 7.8 million Twitter followers, and 13.4 million Facebook followers. Juniper promotes on his social media accounts an initial coin offering (ICO) from Sentara Technologies (Sentara)
promoting its STAR cryptocurrency tokens on the Ethereum blockchain. The purpose of the ICO is to raise capital to enable Sentara to complete and operate what it termed the “world’s first Multi-Blockchain Debit Card and Smart and Insured Wallet,” a financial system that would, purportedly, allow holders of various hard-to-spend “cryptocurrencies” to easily convert their assets into legal tender, and spend these “cryptocurrencies” in “real time” using a Visa- or MasterCard-backed “Sentara Card.”

Juniper posted on his Instagram and Facebook accounts a picture of himself holding a Sentara Card at a shoe store with the caption: “Spending bitcoins, Ethereum, and other types of cryptocurrency in Beverly Hills with my Titanium Sentara Card. Join Sentara’s ICO next month!” In addition, Juniper recorded a video at a department store in Los Angeles, which purported to show him using the so-called “Sentara Wallet” application on an iPhone and a “Sentara Card” to buy several items at the checkout counter. Sentara subsequently posted the video to YouTube under the headline “Lloyd Juniper Spending Bitcoin with Sentara Card & Sentara Wallet.” Although Sentara paid Juniper $100,000 for this promotion, Juniper did not disclose any information about the payment in his posts. Juniper’s actions are

 A. appropriate as a product endorsement typically made by well-known celebrities.
 B. appropriate because Juniper’s social media followers are savvy enough to understand that Juniper is being compensated for the posts.
 C. inappropriate unless Juniper discloses the payment.
 D. inappropriate if the ICO is unsuitable for Juniper’s social media followers.
 E. none of the above.


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 conflicts of interest and disclosure of referral fees. CFA Institute Standard VI(C): Disclosure of Conflicts – Referral Fees requires CFA Institute members to disclose any compensation, consideration, or benefit received from others for the recommendation of products and services. As a professional boxer, it is unlikely that Juniper is a CFA® charterholder subject to the CFA Institute Standards of Professional Conduct. Neither could Juniper arguably be seen as an investment professional (nor his social media followers as investment “clients”) subject to the general ethical principles or suitability requirements applicable to investment advisers.

But although celebrities often capitalize on their fame by making product endorsements, the STAR tokens, as investment contracts, are regulated by the US SEC pursuant to the US Securities Act. Section 17(b) of the US Securities Act makes it unlawful for any person to “publish, give publicity to . . . (or) circulate any communication which, though not purporting to offer a security for sale, describes such security” in return for payment from an issuer, underwriter, or dealer, “without fully disclosing the receipt . . . of such (payment) and the amount thereof.” This provision of US securities law is applicable regardless of the sophistication of the audience for the communication and has the same effect as Standard VI(C) in that it requires disclosure of payments for touting the security. Therefore, Juniper’s actions are inappropriate and a violation of US securities laws because he failed to make the proper disclosure. (If Juniper was a charterholder, his actions would have violated Standard VI(C) as well). Answer C is the best choice.

This case is based on a US SEC Enforcement Action on 29 November 2018.




Image by Peter Thomas 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.

 

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