Write a five page double-spaced essay addressing the case below. This case has three parts: A, B, and C. Your paper should begin by addressing Parts A and B, which go together. Next address Part C. When answering questions, refer to your textbook, reading materials, and class discussions. Incorporate the model steps for resolving ethical dilemmas and the ethical theories that you studied. Also try to incorporate your own personal experience.
Reading for Part A
You are a sales representative at a large computer company (Microtech, Inc., which is publically traded under symbol MCT) that sells new computers and provides technical support to customers. The company offers a number of different technical support packages, ranging from unlimited technical support for three years (the most expensive package) to unlimited technical support for one month (the least expensive package).
You are paid 100% on commission. The company employs thousands of employees of employee's national wide. Second quarter profits failed to meet analysts' expectations, thus pushing the stock price down. Unless the company makes a substantial sale quickly, it may also miss third quarter expectations, further depressing the stock price.
You haven't made a sale in a while and have two young children to support. You also understand that some executives at your company will want to exercise stock options next quarter.
You have a chance to strike a lucrative deal with a Fortune 500 company to sell them 3,000 new computers and three years of unlimited technical support. The purchasing agent from the Fortune 500 company explain that she needs 3,000 computers delivered within two months, or her company will incur high costs.
You have 1,000 new computers in you warehouse that can be delivered on time. However, the remaining 2,000 computers would have to be ordered from the manufacturer. Normally the manufacturer could have them ready for delivery within a month. However, you happened to know that the manufacturer has a long list of back-orders and will take four to five months to deliver.
Closing the deal now would ensure that your company exceeds projected sales for the third quarter. That would boost company's stock price and help executives who want to exercise stock options. You would also earn a big commission.
You have a choice. You could tell the Fortune 500 purchasing agent, "no problem," sign the contract, deliver 1,000 computers quickly, and then blame the delay of the other 2,000 computers on the manufactures. Your contract would specify that your company is not liable for manufacture delays, so you'd be covered. Or you could tell the Fortune 500 Company the truth and risk losing the deal.
Questions on Part A
What pressure do you face? What are the sources of pressure? How might these pressures affect your judgment? What could you do to address these pressures? What questions should you ask yourself as you decide whether to close the deal or not with the Fortune 500 purchasing agent. List as many questions as you can and try to answer each one. Who would be affected if you chose to close the deal with the Fortune 500 Company? Describe exactly how each entity/person would be affected in the short term and the long term. What would your final decision be? What ethical theory/ theories would you use to justify your final decision?
Reading for Part B
Your significant other, with whom you share and apartment, owns a large computer dealership, Bleevit Computers, Inc. Bleevit refurbishes computers that are returned within the initial warranty period (usually 30 days). The computers that Bleevit refurbishes include the mode that the Fortune 500 Company wants to purchase. You significant other tells you that Bleevit would supply 2,000 refurbished computers by the delivery deadline. So you could have 1,000 new computers delivered to the Fortune 500 company from the manufactures and 2,000 refurbished computers delivered to it from Bleevit, all on time.
Your significant other, who would make a lot of money from this deal, points out to you that the Fortune 500 company would probably never know that any of its computers were not new because Bleevit's refurbished computers look brand new to the untrained eye.
The main different is that refurbished computers tend to crash more often and experience more technical difficulties than new computers. However, your company could probably fix most of these problems through technical support. Although there might be instances where data would be irretrievably lost in a computer crash, these cases would probably not be too frequent.
Additionally, your company could save on the purchase price of computers. Returned computers are generally cheaper than new ones. Bleevit, moreover, can give you company an especially good price because, as you happen to know, it uses cheap child labor in Mexico to refurbish certain computers parts. The children work nine hours a day, seven days a week, in windowless facilities for four dollars a week.
However, your company would lose money on the three-year unlimited technical support package because the 2,000 refurbished computers would require far more technical support than your company would normally expect to provide to a client who purchases 2,000 new computers. However, you would not be there to take the heat, as you plan to leave within nine months to start your own computer dealership.
Questions on part B
What pressure do you face to close the deal with Bleevit? What are the sources of those pressures? How could these pressures cloud your judgment? How might your leaving in nine months affect your decision about whether to close the deal with Bleevit? How should you handle that situation?
Would the fact that the fortune 500 company should probably never know that any of its computers were refurbished make it legal for you company to deliver this computer? Why or why not? Would it make it ethical? Why or why not?
Since technical support would fix many computer problems, would the fact that your company will provide unlimited technical support for three years make it legal for your company to deliver refurbished computers to the Fortune 500 company? Would it make it ethical? Why or why not?
If you bought 2,000 computers from Bleevit, whom would your decision affect? Describe exactly how each entity/person would be affected in the short term and the long term
What questions should you ask yourself as you consider whether to buy 2,000 refurbished computers from Bleevit or not? List as many questions as you can, and try to answer/ address each one.
What would you final decision be? What ethical theory/theories would you use to defend your final decision?
Reading for Part C:
You are an investment and wealth management advisor who advises numerous clients ranging from average income investors to extremely wealthy individuals. In addition, you have several large firms for whom you provide investment consultation. You provide your services for a base fee and take additional fees that are a percentage of your gains from clients. You have a solid reputation and your track record on your investments is very strong.
Your brother, Steve, is the CFO for a company called MicroTech, which is publically traded under ticker symbol ‘MCT' in the U.S. and several other foreign stock exchanges. Steve has been employed at MicroTech for about ten years and also has a large stake in the company. MicroTech sells new computers and related accessories. In addition, they also sell technical support packages that range from unlimited technical support for three years (the most expensive package) to unlimited technical support for one month (least expensive package).
One day while going about your business, you receive a phone call from your brother, Steve. He starts off the conversation normally, making small talk. After a few minutes brother begins to talk business and says he thinks he may have a way for the both of you to make a lot of money. Your brother gives you advance notice that MicroTech has been in confidential talks with a large competitor about a potential merger. Steve states that the deal is 99% certain to happen. The acquisition would give MicroTech a substantial boost in market share, up to a 20% by Steve's estimates.
Steve proposes using this information to make some money. He suggests that you and he form an offshore dummy corporation that will purchase the stock in exchanges that are in countries that do not have insider trading laws or enforcement of insider trading laws (There are approximately 15 counties that have stock markets that do not have insider trading laws. Of the countries that have insider trading laws, only 38 enforce those laws).
Questions for Part C:
What, if any, are the ethical dilemmas presented in the case above? Are there any conflicts of interest that could arise?
How does the fact that international trading laws differ affect the morality and ethics of this situation?
If international laws and cultures have different ethical standards, which ones do you follow? What makes one ideology better than another?
How is it possible that the actions of you and Steve could be done legally overseas but also be considered unethical at the same time?
Aren't laws supposed to support ethical and moral behavior?
Make an ethically based argument on how you should proceed in this situation. Frame your ethical argument in terms of legality or economic resource allocation, or economic social good, or contractual obligations. Also comment on the CFA code of ethics and how the application of the CFA code of ethics may affect your decision.
As you answer these questions, refer to the models for resolving ethical dilemmas and the ethical theories that you studied in class and in your textbook.
Ethical Arguments
General Ethics Discussion:
Utilitarian (John Stuart Mill) ethics vs. Deontological (Kantian) ethics
To whom is the manager responsible? Shareholders, employees, community?
Agency dilemma: manager seeks personal gain, possibly at expense of shareholders.
Legal vs. ethical
Benefits, harms, rights, wrongs
Economic vs. legal
Ethics is based on forming argument, defending argument and decision
Part C discussion:
Is it unethical to trade on material non-public information since those without this information are at a disadvantage? (Fairness (Kantian) argument of ethics)
Since use of material non-public information is legal (or implicitly legal in the case of no prosecution) in some countries, is it also ethical to make the insider trades? (Legal argument of ethics)
By trading on this information the price of the stock will move towards a full information equilibrium price. Those who trade after the new equilibrium price is reached will benefit since the stock is efficiently priced. A few will lose money initially, but many will benefit later. (Economic argument of ethics. In this case the economics supports the ethics of insider trading)
When the market makers and dealers expect insider trading, they increase the spreads which lowers the price sellers receive and raises the price buyers pay for stock. The "information" effect of legal insider trading can make the market less efficient and raise the cost of capital. Higher cost of capital makes capital allocation less efficient and the economic resource allocation less efficient in general. (Economic argument of ethics. In this case the economics does not support the ethics of insider trading)
Steve then argues that your clients have hired you to manage their accounts and to maximize returns for the risk level they have specified. By not acting on the inside information in markets where it is legal to do so, you are violating the contract with the clients. (Utilitarian argument that many will benefit from your actions. Could argue that your contract permits insider trading since you are benefiting the clients)
Discuss the CFA code of ethics, which is pro-client based, but also prohibits the use of insider information for yourself or clients.
References:
CFA Code of Ethics
"The Ethics of Management" 6th Edition, by LaRue Tone Hosmer
Utpal Bhattacharya, Hazem Daouk, 2002, "The World Price of Insider Trading", Journal of Finance, Feb 2002, pp 75 - 108.
"Investment Ethics", Sarah Peck, Wiley Publishers, 2011.