Ethics Case Study of the Week: The Short Attack

By Gary Sarkissian posted 07-31-2022 22:42

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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 among industry participants.

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 ethics case to help reinforce the code and standards. 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.

The Short Attack
Bryce is an independent research analyst who also publishes articles on the popular crowd-sourced financial website AlphaRally. Recently, Bryce was hired by the CIO of the hedge fund Platypus Capital to conduct research on one of its short positions in Belltower, Inc. After conducting a brief review of Belltower’s business and submitting his findings to Platypus, Bryce decided to follow up by writing a scathing analysis of the firm, at times making unsubstantiated claims regarding its business arrangements and its solvency.

His analysis was published as an article on AlphaRally under Bryce’s pseudonym “Codex Regius.” In addition, leading up to the publication of his short report, Bryce purchased put options on Belltower. Upon publication, the market reacted by driving Belltower’s stock price down 35% in a single trading day.

Which of the following statements concerning this case is accurate?

A. Bryce did not violate the standards as his analysis was posted on an open, crowd-sourced website, where analysts can freely post their opinions on securities.
B. Bryce did not violate the standards as market participants would not be able to trace his identity via his pseudonym “Codex Regius.”
C. Bryce violated Standard III(B) Fair Dealing as he should have allowed his client Platypus the opportunity to also purchase put options ahead of his analysis being published.
D. The CIO from Platypus Capital is in violation of the standards.
E. None of the above.

What do you think is the correct choice? The “Analysis” section below will walk through the reasoning and provide the correct answer. Also, 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.

Analysis
This case involves Standard II(B) Market Manipulation, which states that “Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.” The case indicates that Bryce made unsubstantiated claims regarding Belltower’s business arrangements and solvency, both of which could materially affect the markets sentiment towards the company’s stock. By posting his analysis on an influential financial website, he was able to cause the market to react negatively, which ultimately benefited him as he was long put options in Belltower’s stock leading into the publication of his article.

Answers A and B are both incorrect as Bryce’s action were in violation of Standard II(B) Market Manipulation, and the use of AlphaRally’s platform or his pseudonym do not absolve him from the harm he has caused to investors of Belltower. Answer C is incorrect as the standard regarding Fair Dealing is irrelevant to this case. Answer D would be valid if it was determined that the CIO of Platypus was a co-conspirator of Bryce’s short report. The best answer choice is E.

This case was written by Gary Sarkissian, CFA and is based on a real-life case that involved a publicly traded REIT.

Image by Daniel Albany from Pixabay

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