Investment Ethics


Investment Ethics



The need for ethical education is as long standing as the history of scandals that plague the financial industry. Understanding the cause and effect of economic crises and scandals from an ethical perspective ensures the long run health of our financial markets. Sarah W. Peck’s Investment Ethics is an applied and uniquely focused textbook that provides students with the tools, examples, and exercises they need to understand ethical concepts and consequences in the practice of finance; especially regarding investments. This text serves not only as a key tool in the classroom, but also a longstanding guide for examining the ethical practices of companies and organizations.



Publication Date





Hoboken, NJ



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


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- Jérôme Kerviel and Société Générale- 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?


Investment Ethics