Ethics and the conduct of business 8th by john boatright and smith 2017 chapter 11

Ethics and the Conduct of Business

Eighth edition

Chapter 11
Ethics in Finance

Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved


Modules

•

Introduction: Ethics in Finance

•

11.1: Financial Services

•

11.2: Financial Markets

•

11.3: Insider Trading

•

11.4: Hostile Takeovers

•

Conclusion: Ethics in Finance

Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved


Learning Objectives (1 of 2)
•

11.1: Explain the three basic forms of ethical misconduct when selling financial products and services,
and the responsibilities brokers have to their clients

•

11.2: Assess the significance of the three main elements of fairness in financial markets and the ethical
issues introduced by new financial instruments and practices

•

11.3: Summarize the two main arguments against insider trading and the challenges in applying these
theories to its prevention and prosecution

Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved


Learning Objectives (2 of 2)
•

11.4: Analyze the ethical issues raised by various hostile takeover tactics and what they suggest about
the rights and fiduciary duties of officers and directors

Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved


Introduction: Ethics in Finance

•

Case: Goldman Sachs

•

Creating the deal

•

Expert analysis

•

Collapse of the deal

Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved


Figure 11.1: Objectionable Sales Practices for Financial Products

Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved

11.1: Financial Services (1 of 2)
Objective: Explain the three basic forms of ethical misconduct when selling financial products and services, and the responsibilities brokers have to their
clients

11.1.1: Deception

Overview
Information that should be disclosed
11.1.2: Churning

Overview
Legal definition of churning
Issues in defining excessive trading
Best practices to avoid churning

Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved


11.1: Financial Services (2 of 2)
Objective: Explain the three basic forms of ethical misconduct when selling financial products and services, and the responsibilities brokers have to their
clients

11.1.3: Suitability

Meaning
Common causes of unsuitability
Ethical principles

Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved


Figure 11.2: The Equity/Efficiency Trade-Off

Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved


11.2: Financial Markets (1 of 2)
Objective: Assess the significance of the three main elements of fairness in financial markets and the ethical issues introduced by new financial instruments
and practices

11.2.1: Fairness in Markets

Overview
Regulation of financial market protects everyone
Fraud and manipulation
Unequal information
Unequal bargaining power

Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved


Table 11.1: Fraud and Manipulation in Financial Markets
What is fraud?

Willful misrepresentation of a material fact that causes harm to a person who reasonably relies on the
misrepresentation

Who is a fraud?

Anyone involved in the buying or selling of securities who makes a false or misleading statement or engages in
any practice or scheme designed to defraud

Who is vulnerable?

Investors (buyers and sellers) are particularly vulnerable because the value of financial instruments often
depends on information that is difficult to obtain or verify.

How is manipulation different?

Manipulation involves buying or selling securities to create a false or misleading impression about future prices,
rather than just misrepresenting facts.

How can both be prevented?

Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved

Fraud and manipulation can be prevented by providing investors with easy access to reliable information.


11.2: Financial Markets (2 of 2)
Objective: Assess the significance of the three main elements of fairness in financial markets and the ethical issues introduced by new financial instruments
and practices

11.2.2: Derivatives and HFT

Derivatives
High-frequency trading

Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved


11.3 Insider Trading (1 of 2)
Objective: Summarize the two main arguments against insider trading and the challenges in applying these theories to its prevention and prosecution

11.3.1: Theories of Insider Trading

Fairness theory
Property rights theory
11.3.2: Evaluation of the Two Theories

Fairness theory
Property rights theory

Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved


11.3 Insider Trading (2 of 2)
Objective: Summarize the two main arguments against insider trading and the challenges in applying these theories to its prevention and prosecution

11.3.3: Recent Insider Trading Cases

The O’Hagan decision
Galleon and the mosaic theory

Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved


Figure 11.3: Causes of Unequal Bargaining Power

Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved


11.4 Hostile Takeovers (1 of 2)
Objective: Analyze the ethical issues raised by various hostile takeover tactics and what they suggest about the rights and fiduciary duties of officers and
directors

11.4.1: Market for Corporate Control

Advantages
Challenges
Review
11.4.2: Takeover Tactics

Takeover process
Defensive measures
Ethical issues

Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved


11.4 Hostile Takeovers (2 of 2)
Objective: Analyze the ethical issues raised by various hostile takeover tactics and what they suggest about the rights and fiduciary duties of officers and
directors

11.4.3: Role of Directors

Board members’ role

Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved


Conclusion: Ethics in Finance

•

They bear on our financial well-being

•

Misconduct has the potential to rob people of their life savings

•

Should emphasize integrity of financial professionals and ethical leadership

•

Principles are duty of fiduciary and fairness

Copyright © 2017, 2012, 2009 Pearson Education, Inc. All Rights Reserved