2021 INDUSTRY PRACTITIONERS’ ETHICS CHALLENGE - CASE A (1) (1).pptx

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1. 1 2021 INDUSTRY PRACTITIONERS’ ETHICS CHALLENGE    CASE STUDY A – MGM SECURITIES LIMITED PRESENTATION BY: TEAM ACE

2. 2 MGM SECURITIES LIMITED INTRODUCTION Following our review of this case study, we confirmed that this case involves the violation various Standard of Professional Conducts. In order to establish these facts, there is need for independent examination of each facts in this case by looking at each standards violated as presented in the following slides. Our findings are presented in the following format; Standard Recommendation: Commentary: Excerpt Lists of standard violated and/or under review Short excerpt from the case study where the violation was detected Our observation/comments on the violation that occurred Our recommendation on how to ensure that the violation doesn’t occur

3. 3 MGM SECURITIES LIMITED Summary of the case study The case study is typically about how employers of MG securities limited (an investment bank) in the persons of John Annan CFA, and Edward Appeadu CFA (John’s supervisor) violated CFA standards. The employers, who were saddled with the responsibilities of analyzing the books of AR resources an already ailing company and to give an objective ‘Strong’ or ‘Buy’ recommendation to investors ended up issuing a misleading report to the investors. John and Edward ended up violating fourteen (14) various standards of CFA which will be elaborated on as the presentation unfolds. In the end, the employer’s misleading report and inappropriate recommendations issued to the public caused investors to make wrong investment decisions. This could have been avoided if Edward and John were not influenced by their financial interest and conflicting interest in AR resources. These unethical actions were aided by the CFO of AR resources who also violated the standards.

4. List of standards violated Standard I (B): Independence and Objectivity Standard V (A) Diligence and Reasonable Standard II (A) Material Nonpublic Information Standard IV (A) Loyalty Standard I(C): Misrepresentation Standard II (B): Market Manipulation Standard III (A): Loyalty, Prudence, and Care Standard I (A): Knowledge of the Law Standard IV(C): Responsibilities of Supervisors Standard VI (A): Disclosure of Conflicts Standard V (B): Communication with clients and prospective clients Standard I (D): Misconduct Standard III (B): Fair dealing Standard VII (A): Conduct as Participants in CFA Institute Programs 4

5. 5 Standard I (B) – INDEPENDENCE AND OBJECTIVITY Recommendation: John, in order not to be in violation of standard I(B) should disclose to his employers all the special treatment he received during the conference as this may affect his independent and objective recommendation of AR’s financial position. According to Standard I (B), Anan is required to make independent and objective decision. At the conference, AR covers the cost of Annan’s transportation, hotel accommodations, and golf fees. what was expected of John Annan is to reject the lavish and extravagant gifts that come with this arrangement because this will compromise his independence and objectivity. Commentary: CFA Institute Standard I (B): Independence and Objectivity requires CFA Institute members and candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities, also members and candidates “must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity”. Excerpt: Each day during the conference, Anan plays “golf” with AR’s senior management…In the evening, Anan attends “lavish” dinner with AR’s senior management. AR covers the cost of Anan transportation, hotel accommodation and golf fees.

6. 6 Standard V (A) – Diligence and Reasonable Basis Recommendation: We recommend that John, as the research analyst in charge of AR resources financials, should dissociate himself from the report- i.e putting a disclaimer on the report modified by Appeadu, report to top management, since Appeadu who is supervisor is a pioneer of the violation or resign . Edward Appeadu, CFA is in violation of standard V (A), diligence and reasonable basis because he did not give consideration to reasonableness before he struck a deal with Ahafo Resources (AR) management on recommendation of “strong buy”. The Standard V (A) required Edward Appeadu to wait and make sure that he does not give any recommendation until due diligence has been carried out on AR and its operation, and facts are established beyond reasonable doubts before such recommendation was made. In respect to John Annan, he did not violate the Standard V (A) as it could be seen from the case , Commentary: CFA Institute Standard V (A) Diligence and Reasonable Basis states that CFA Institute members “must exercise diligence, independence, and thoroughness in analysing investments, making investment recommendations, and taking investment actions.” Excerpt Appeadu:…I just wanted to let you know that I made some modifications to your research report. First, I changed your “neutral’’ recommendation to a ‘’strong buy’’.

7. 7 Standard II (A) – Material Non-Public Information Recommendation: We recommend John not to act on this material nonpublic information, till the information becomes public which is mostly through the company’s published audited financial statement. John Annan’s Son violated Standard II (A) by sharing information about his employer with his father because of family relationship that existed between them. John Annan is not working for AR, rather is his employer (MGM Securities Limited) that is the client of AR whom John Annan worked for, so it is not ethical for John Annan’s Son to share with his father information that supposed remained within the company (AR). Another violation of Standard II (A) is the situation in which Edward Appeadu allowed CFO of AR to have access and review John Annan’s report which should remain secret and Material Non-public Information until it is made available to the knowledge of the public either by publishing it on the official website of the company (MGM Security Limited’s website). In respect of this situation both Edward Appeadu and The AR’s CFO violated Standard II (A) of CFA Institute Code of Ethics Standard of Professional Conducts . Commentary: CFA Institute Standard II (A) Material Nonpublic Information prohibits members who are in possession of material nonpublic information that could affect the value of an investment from acting on that information. Excerpt: Annan: : I am very familiar with AR because my son has worked for the company as an engineer for the past three years. Recently, he told me that the company has been struggling financially because of the huge environmental costs it has been incurring.

8. 8 Standard IV(A) LOYALTY In this case, John Annan’s Son owe a duty of loyalty to his employer (AR) as an engineer of the company which made him an insider, and any information coming from such individual is taking seriously and is considered as first-hand because he knows a lot about the company’s harmful operational practices. Commentary: CFA Institute Standard IV (A): Loyalty requires in matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer Excerpt: Appeadu:…. my son worked for AR, he told me that the company has been struggling financially because of the huge environmental costs it has been incurring.

9. 9 Standard I (C) – Misrepresentation Recommendation: We recommend that Anaan disclose the true picture of the financial statement to his clients and also including a disclaimer to exonerate himself from the report. John Annan violated Standard I (C) when in his report, Annan does not discuss AR’s accounting methodology, and he does not include his opinion that the company’s revenues and earnings are overstated based on his previous discovery . Commentary: CFA Institute Standard I(C): Misrepresentation, which states that CFA Institute members and candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities. Excerpt: Anaan: …and after reviewing and analysing AR’s recent financial statements, I noticed that they are using complicated accounting methods and techniques that I believe overstate their revenues and earnings. …. A week later, Annan submits his research report on AR to Appeadu with a “neutral” recommendation. In his report, Annan does not discuss AR’s accounting methodology, and he does not include his opinion that the company’s revenues and earnings are overstated. Anaan…”Every time I asked a question about their current financial condition and position, the CFO gave me an evasive answer.”

10. 10 Standard I (A) – Knowledge of the Law In this case, Edward Appeadu, CFA, John Annan, CFA, and CFO of AR were aware of these rules and regulations of the market and also have knowledge of the law operating in Ghana which stipulates how financial and capital market should operate. They all violated the law by withholding the knowledge of material information that could affect, distort the market and impaired on the judgement of market participants and investors in AR and not disclosed to the public. Commentary: CFA Institute Standard I (A): Knowledge of the Law states that CFA Institute Members and Candidates must understand and comply with all applicable laws, rules, and regulations. In the event of conflict, Members and Candidates must comply with the more strict law, rule, or regulation. Excerpt: Appeadu:…The CFO thought that your annual revenue and earnings growth projections of 8% and 5%, respectively, were too low, so I increased them to 12% and 10%, respectively

11. 11 Standard IV (C) – Responsibilities of Supervisors In this case, Edward Appeadu, CFA has failed in his capacity as a supervisor and has violated standard IV(C). As a supervisor he is responding for upholding ethical standards, reverse is the case here as Appeadu(John supervisor) championed and encouraged John Annan to act unethically as seen on the excerpt above. Commentary: CFA Institute Standard IV(C): Responsibilities of Supervisors states that “[CFA Institute] members must make reasonable efforts to ensure that anyone subject to their supervision or authority complies with applicable laws, rules, regulations, and the Code and Standards.” Excerpt: Appeadu:…“I just wanted to let you know that I made some modifications to your research report. First, I changed your “neutral” recommendation to a “strong buy.” I also allowed AR’s CFO to review your report. The CFO thought that your annual revenue and earnings growth projections of 8% and 5%, respectively, were too low, so I increased them to 12% and 10%, respectively. I then emailed your report to our 10 largest clients to get their reaction to it. Later that same day, after receiving positive feedback from them, I posted your report on MGM’s website. To increase interest in AR’s upcoming secondary offering, I instructed MGM traders to simultaneously purchase and sell large blocks of AR shares and to place buy and sell orders for AR shares at the same price” that violated the code of ethics standard practice as a member of CFA Institute.

12. 12 Standard VI (A) – Disclosure of Conflicts John Annan, CFA, Appeadu and the CFO has violated Standard VI (A). John by his non disclosure in his research report of his conflict of interest to his employer and its clients. Appeadu violated the standard by not declaring his financial interest in AR to MGM(his employers) CFO of AR, violated the Standard VI (A) by not disclosing his actions and conflict of interest to his employer (AR) and its clients. Commentary: The CFA Institute standards related to conflicts of interest. Standard VI (A): Disclosure of Conflicts requires “Members and Candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. Excerpt: Anaan:…. “He also does not disclose that his son works for AR”

13. 13 Standard V (B) – Communication with Clients and Prospective Clients Appeadu CFA, John CFA, and CFO of AR violated Standard V (B) of CFA Institute Code of Ethics Standard of Professional Conducts in which they all failed to communicate appropriately the true state of the financial position of AR through AR’s financial statement rather published false information on MGM website by doctoring John Annan’s research report on AR. Commentary: The CFA Institute Standard V (B): Communication with clients and prospective clients states that CFA Institute “Members and Candidates must disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyze investments, select securities, and construct portfolios and must promptly disclose any changes that might materially affect those processes. Excerpt: Anaan: In his report, does not discuss AR’s accounting methodology, and he does not include his opinion that the company’s revenues and earnings. Appeadu:…I then emailed your report to our 10 largest clients to get their reaction to it. Later that same day, after receiving positive feedback from them, I posted your report on MGM’s website.

14. 14 Standard I (D) – Misconduct Appeadu, CFA violated Standard I (D) of CFA Institute Code of Ethics and Standard of Professional Conducts by engaging in the acts that tarnished the image of CFA Institute and its reputation, brought disrepute, shame, and dishonour as a member of the Institute thereby involved in illegal activities Commentary: CFA Institute Standard I (D): Misconduct states that CFA Institute “Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence”. Excerpt: Appeadu:… “I just wanted to let you know that I made some modifications to your research report. First, I changed your “neutral” recommendation to a “strong buy.” I also allowed AR’s CFO to review your report. The CFO thought that your annual revenue and earnings growth projections of 8% and 5%, respectively, were too low, so I increased them to 12% and 10%, respectively. I then emailed your report to our 10 largest clients to get their reaction to it. Later that same day, after receiving positive feedback from them, I posted your report on MGM’s website. To increase interest in AR’s upcoming secondary offering, I instructed MGM traders to simultaneously purchase and sell large blocks of AR shares and to place buy and sell orders for AR shares at the same price”

15. 15 Standard II (B) – Market Manipulation Edward Appeadu, CFA intentionally furnished the MGM, AR and other market participates who traded in AR secondary equity offering with falsified information in John Annan’s research report. Despite knowing that the information will distort the market and cause the investors to act. Commentary: CFA Institute Standard II (B): Market Manipulation states that CFA Institute “Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants”. Excerpt: Appeadu:… First, I changed your “neutral” recommendation to a “strong buy.”… I then emailed your report to our 10 largest clients to get their reaction to it. Later that same day, after receiving positive feedback from them, I posted your report on MGM’s website.

16. 16 Standard III (B) – Fair Dealing Edward Appeadu, CFA, John Annan, CFA, and CFO of AR were all in violation of Standard III (B) of CFA Institute Code of Ethics and Standards of Professional Conduct. Evident in the use of complicated accounting methodology, overstated revenue and earnings projection, placing large block of shares order to buy and sell to instruct wife and friends in taking short position in AR shares at the expense of other AR clients and market participants. Commentary: CFA Institute Standard III (B): Fair dealing states that CFA Institute “Members and Candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities”. Excerpt: ……In his report, Annan does not discuss AR’s accounting methodology, and he does not include his opinion that the company’s revenues and earnings are overstated.

17. 17 Standard VI (B) – Priority of Transactions John Annan CFA, violated Standard VI (B) by instructing his wife and close friend to take short position (front running) while the manipulated report says otherwise. Commentary: CFA Institute Standard VI (B): Priority of transaction states that CFA Institute “Members and Candidates must ensure Investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner”. Excerpt: ….Annan is so angry when he hears about the changes Appeadu made to his report that he immediately calls his wife and instructs her to take a short position in AR shares in her investment account…. He then phones his close friend and former colleague, Kofi Dansua , an independent financial advisor (IFA) and client of MGM. Annan recommends to Dansua that he either sell or sell short AR shares in all of his clients' accounts.

18. 18 Standard III (A) – Loyalty, Prudence and Care John Annan, CFA, Edward Appeadu, CFA, and CFO of AR were all in violation of Standard III (A) of CFA Institute Code of Ethics and Standards of Professional Conduct in which they all acted with disloyal attitude, recklessness and carelessness in handling the appraisal of the investment techniques, methodology, management and evaluation of this investment suitability for their clients . Commentary: CFA Institute Standard III (A): Loyalty, Prudence, and Care states that CFA Institute “Members and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members and Candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests”. Excerpt: Appeadu:…The CFO thought that your annual revenue and earnings growth projections of 8% and 5%, respectively, were too low, so I increased them to 12% and 10%, respectively .

19. 19 Standard VII (A) – Conduct as Participants in CFA Institute Programs John Annan, CFA and, Edward Appeadu, CFA both violated Standard VII (A) in this case as both were CFA Institute members and were aware of CFA Institute Code of Ethics and Standards of Professional Conducts that each member acknowledged to adhere to and uphold even if the law permits that act. Commentary: CFA Institute Standard VII (A): Conduct as Participants in CFA Institute Programs states that CFA Institute “Members and Candidates must not engage in any conduct that compromises the reputation or integrity of CFA Institute or the CFA designation or the integrity, validity, or security of the CFA Institute programs”. Excerpt: Appeadu:… “I just wanted to let you know that I made some modifications to your research report”. First, I changed your “neutral” recommendation to a “strong buy.” I also allowed AR’s CFO to review your report. The CFO thought that your annual revenue and earnings growth projections of 8% and 5%, respectively, were too low, so I increased them to 12% and 10%, respectively. ….Annan is so angry when he hears about the changes Appeadu made to his report that he immediately calls his wife and instructs her to take a short position in AR shares in her investment accounts…etc