Case Study on CFA Institute Standards of Professional Conduct

CFA Institute Standards of Professional Conduct

As a chairman of many Berkshire Hathaway subsidiaries, avid Sokol was to be the most probable successor of Warren Buffett in future. However, this changed when he executed business transactions that were deemed too controversial with regard to his request to buy the company as well as the timing. The following is an analysis of the case between David Sokol and Mikkel Orut, highlighting the CFA Institute Standards of Professional Conduct that were violated and the appropriate actions that Mikkel Orut ought to take.

Evaluation of Sokol’s Conduct

One of the applicable standards is knowledge of the law, which requires the CFA members to abbey the regulations governing the practice. In the event of a conflict, the CFA members must ensure that they do not help the other parties commit financial irregularities. If the member realizes that the law was violated, they should not try to cover it up but should report. In the current case, Sokol denied any breach of regulations when carrying out the transactions and this implies that he had adequate knowledge of the law. The other applicable regulation is misrepresentation, which prohibits the use of credentials and names of other persons in transactions. In the current case, the standard is not violated because the recommendation made by Sonkol was based on the research he conducted on Lubrizol. The other standard applicable to the case is market manipulation that requires companies and individuals to desist from using inside information for their personal gains. Although Sokol made huge transactions of Lubrizol shares, there is no proof that he intended to manipulate the market.

Misconduct is the other applicable CFA standard, which requires the professionals involved to make their decision based on truthful facts without any incidents of fraud or dishonesty. This is one of the standards that Sokol violated, in relation to the recommendation he gave about Lubrizol. He was aware that he was supposed to disclose all the information pertaining to the transaction but he did not disclose the holdings in the company until the acquisition was complete. The other standard that Sokol violated relates to material nonpublic information, which prohibits insider trading. Sokol made decisions based on internal forecasts about Lubrizol that he accessed, showing a clear violation of the standard.

Necessary actions by Mikkel Orut

Based on the facts in the case, it is clear that Orut has a duty to ensure that his actions as CFA charter holder do not violate the professional standards. Having identified clearly that Sokol made his investment decisions based on internal information he obtained, he needs to report the misconduct to a higher authority. To ensure that he makes the right decision, Orut may follow the ethical decision-making framework.  Based on the approach, the decision he makes should be influenced by the evaluation of the impact it will have on the parties involved. By reporting Sokol’s unlawful activities, Orut will ensure that the same incidence does not happen in future in case there are other parties contemplating about it. The reporting also restores the confidence of shareholders in the money markets as they are confident that they do not face insider trading threat which may adversely affect the price of shares. The fact that Sokol admitted to the knowledge of law implies that he made a conscious decision to break it through insider trading and thus should face the legal consequences.