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Investment Ethics


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Table of Contents

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- Jerome Kerviel and Societe Generale- 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

About the Author

Sarah Peck is the author of Investment Ethics, published by Wiley.

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