CONFLICTS OF INTEREST AND ETHICS CASE STUDIES FOR STUDENTS DAY 1 CASE STUDIES 1 Case Study 1 : The Investment Bank (a subsidiary of Holdco) has a Proprietary Investment Department which deals in commercial real estate. It often finds potential development sites, gets together the finance for them, organises the development of the project and, as a co-venturer, gets the project started. Packaged Product Manager Limited (another subsidiary of Holdco) is considering launching a new packaged product, being an Open-Ended Investment Company (OEIC), which will invest in commercial real estate. The proposal has the approval of senior management within Holdco, but only on the basis that the Manager, effectively, joint ventures the launch of the fund with the Investment Bank. This is because the commercial real estate expertise within the Group is in the Investment Bank s Proprietary Investment Department. The OEIC documentation is in the standard form and does not refer to the involvement of Group members such as the Investment Bank. The Prospectus for the OEIC explains that the Investment Bank s Proprietary Investment Department will find deals for the OEIC to invest in, carry out the due diligence on whether it is or is not a good deal and, initially, the Investment Bank will itself buy the development site. It will arrange all necessary finance and organise the development by employing the surveyors, architects, builders etc etc. When the project is in development phase, the Investment Bank may then sell to the OEIC the Bank s stake in the project at the then market value. The OEIC will itself approve each purchase of the Investment Bank s stake in a development at a board meeting. The five directors of the OEIC comprise two employee/directors of the Investment Bank, two directors of Packaged Product Manager Limited, and one independent non-executive with commercial real estate experience. The target investors for the OEIC are clients of the Broker/Dealer and Asset Management Companies in the Group. To incentivise their front office staff to sell units in the OEIC, the sales structure is as follows: (i) (ii) The Broker/Dealer will in all cases buy the units at a discount (98) to the issue price (100). It will as a principal sell to its clients, being a mixture of high net worth individuals and institutions, at 100. Where Asset Management arranges for its clients, both discretionary and non-discretionary and high net worth individuals and institutions, to buy units, Broker/Dealer will sell, as a principal, to the client at the issue price 1
(100) and Asset Management will receive a retrocession of 2 from the OEIC. (iii) Individuals within the Broker/Dealer and Asset Management who arrange for their clients to buy units will, in their annual bonus, receive 50% of, as the case may be, Broker/Dealer s discount of 2 and Asset Management s retrocession of 2. 2 Case Study 2 : Petroleum Bank wins the mandate to arrange a secondary placing of shares for The Energy Company PLC on the London stock market AIM. The Energy Company PLC is seeking to raise 5million additional funds to acquire an oil exploration site in Canada. Petroleum Bank Corporate Finance enters the deal onto its work in progress list and proceeds to make arrangements for the transaction. Compliance receives a request from Corporate Finance to involve the Oils Research Analyst in preparations for the placing and with a view to the analyst producing research on The Energy Company PLC in connection with the placing. In reviewing the Chinese Wall crossing request Compliance identifies that the Oils Analyst holds 10,000 shares in The Energy Company PLC which he appears to have held since joining the firm one year ago. Compliance makes inquiries to ascertain the extent of The Energy Company PLC s business relationships with the Bank and discovers that they have been a good client of the commercial side of the Bank for about two years, and that the Bank has recently approved a revolving credit facility for 3million. On two occasions funds have been wired out in Canadian dollars to the Calgary branch where The Energy Company PLC holds a Canadian dollar account used to support its local business interests and operations. Compliance also identifies that the Head of the Calgary branch of the Bank recently submitted a request for approval to act as a Non Executive Director of The Energy Company PLC at a salary of 10,000 per year plus share options to the value of 50,000 exercisable in 12 months. 3 Case study 3 Firm is engaged in a competitive IPO process. The firms who are bidding to win the mandate are submitting their preliminary research to the client. Firm's research note is less upbeat than the notes produced by the other analysts who are pitching for the deal. IBD send the draft back to the analyst with I think we need to look at this again written across the top. 4 Case Study 4 2
Firm's trader has just witnessed an almighty row between the head of trading and a senior and respected analyst. Whilst the meeting is in one of the side offices to the trading floor the trader is clearly able to hear the head of trading. "...You can not possibly think of downgrading XYZ Plc to a sell, don t you know how much of it we are carrying?... I only care about my book... Later that afternoon trader takes a call from one of your second tier accounts they are enquiring into prices and sizes to buy in XYZ Plc. 5 Case Study 5 A. : Bank ABC is looking to pitch to a private equity firm to lead a sell down of its 25% stake in Alpha plc by way of an accelerated bookbuild. Ian, the Equity Capital Markets (ECM) banker speaks to the covering research analyst, Anna, to see whether she is willing to help review a pitch presentation he is planning to give to the client. Anna is more than happy to help and suggests that she should also come along to the client meeting just in case the client has any questions on the underlying company. In preparation for the meeting Ian asks Anna to phone a few clients to gauge investor appetite in the stock. Unfortunately Anna is too busy to make the calls herself and happens to be travelling at the time when the pitch is eventually scheduled. Anna provides feedback on the pitch presentation but in her absence asks her specialist salesperson to gather feedback and attend the pitch. The pitch is successful and the bank is mandated to lead the sell down subject to favourable market conditions. Ian informs the Conflicts Office of the mandate. B. Separately within Bank ABC, Simon, an M&A banker is working on a pitch to another client, Beta plc, on the potential takeover of Alpha plc. In order to better understand the company, Simon approaches the bank s secondary loan trading desk which has loan positions in Alpha plc. The secondary loan trader provides Simon with loan documentation the desk has received by way of company background. Simon, in order to be seen as being supportive of his client s potential bid, decides to buy some stock in the target. He submits a request to his external broker who goes ahead and facilitates the request. A copy contract is sent to Bank ABC s Compliance department. Beta plc, impressed by the banking team s pitch and knowledge of the target, offer Bank ABC the lead advisory role on the M&A and passes over proprietary information about its business so that Simon can start thinking about potential synergies. Simon notifies his Conflicts Office of the mandate. C. The CEO of Alpha plc, aware of growing bid speculation in the market decides to approach his client account executive, Toby, at Bank ABC. In the meeting, the CEO mentions the company intends to sell some non-core assets in order to raise cash so it can be in a strong position to fend off any unwelcome suitors. The CEO states that the company has already held initial talks with Gamma plc who had previously shown interest in the assets but is unsure whether Gamma plc can afford the assets. Regardless, the company has decided to run an auction process for the assets sale to ensure the highest price. Bank ABC is offered the mandate to run the auction. Toby informs the Conflicts Office for the mandate. 3
D. Toby, in order to have a competitive auction process and keen to initiate a banking relationship with Gamma plc, takes the initiative and arranges to meet Gamma plc representatives to discuss financing possibilities. During the meeting, Toby agrees to provide a loan to the company at a discounted rate in order to help its acquisition of the Alpha plc assets in return for Gamma plc agreeing to start sending its securities trading business via Bank ABC s securities sales and trading department. As it turns out Gamma plc is interested in investing in financial derivatives and accepts the offer. Toby logs the new client and the provision of the loan with the Conflicts Office. E. Anna receives a call from the Alpha CEO. During the conversation, the CEO mentions in confidence that Alpha plc is looking at options to strengthen its balance sheet and should hopefully be announcing a sale of non-core assets shortly. He hopes that this will revise Anna s view on the company and urges her to write a report highlighting the strengths of the company. After the phone call, Anna revisits her model and after some further thought/analysis about the company s long term prospects decides to upgrade her recommendation on the company. Anna decides not to mention the details of her call with the CEO because she views the information as not material to her change in recommendation but decides to include in the report a scenario analysis of potential ways the company could improve its prospects in light of the market rumours of it being a potential target. Anna informs her specialist salesperson so he is prepared for the note the following morning. In turn, the salesperson informs his trader so he can position himself for the anticipated business on the back of the pending report. The trader buys the stock for his books. After the close of business, Anna receives a call from a large pension fund asking for her advice on Alpha plc. DAY 2 CASE STUDIES 6 Case Study 6 : Multibank Investment Banking department acts as financial adviser to EFG, a publicly listed company on the sellside. The fee structure is set at 75% of the overall fee for a successful sale of the company. The potential bidder, PQR is a Private Equity House and will undertake a leveraged buyout, requiring significant financing, Multibank Lending seeks to provide a third of the financing required via a bridge loan for PQR. The deal is initially recommended but shareholder commentary is broadly negative and an EGM is being considered. Multibank has a major private banking client with a large (4%) stake in EFG, who contacts his broker seeking advice if he should accept the offer. 4
Multibank was arranger on an original bond issuance for EFG three years ago and is Trustee to the existing bondholders. It becomes clear the bonds do not have a change of control covenant and are currently ranked B+. Multibank s custody business has 28% of the market capitalisation of EFG in nominee accounts and despite sending out shareholder requests does not receive voting direction ahead of the EGM on most of the holdings, 25% of the EFG market capitalisation. Multibank is asked to provide a fariness option to the board of directors ahead of the EGM which has been forced on the board. 7 Case Study 7 123 Hedge Fund is being advised by Multibank on a private placement to raise additional capital. One of 123 Fund s current large exposures is to ABC Ltd. Multibank is planning to distribute some of 123 Fund s private placement through its private bank to private clients of Multibank Private Client and to take some of the placement as part of a new leveraged fund incentive scheme for senior management of Multibank. Multibank is a large lender to ABC Ltd which discloses to the syndicate banks that it is struggling to meet covenant payments on its debts. ABC Ltd is moved into Multibanks loan workout group for troubled lenders. Multibank s research analyst decides to write a piece on the glowing outlook for ABC Ltd which he wishes to move to a buy rating. 8 Case Study 8 Multibank is acting as corporate broker and sponsor to Tension SA a company listed in South Africa and the LSE. Tension is a successful start up mining company which has identified a promising new gold mine in South Africa after its initial listing, resulting in a large shareprice increase over the prior 6 months. Tension is now looking to acquire a smaller rival for cash after a recent secondary offering bookrun by Multibank. Multibank is pitching for the advisory role which is a key new sector for the M&A team. The Corporate Broking team having just been to a training session on disclosure rules catch up with the Tension CEO and mention that the new requirements to disclose material matters to the market are getting a lot of attention from the UKLA. The Tension CEO, very unusually, cuts short the lunch saying she has urgent matters to attend to. The Corporate Broking team speak to the Investment Banking team and ask if there are issues with the Tension deal because the CEO seemed very jumpy. Corporate 5
Broking also mention some rumours in the local South African press that the new Tension mine is near an old underground river complex (which can result in false readings of mineral and precious metal deposits). The Head of Investment Banking says he is sure it is nothing and anyway it should not be raised before the pitch in two days but he'll mention it after the meeting. A research analyst is brought over the Chinese Wall to help write the pitch document for Investment Banking. Corporate Broking have knowledge of Tension s half year results which are to be published in a few days time and want to bring another research analyst, who follows Tension, over the Wall so that the analyst can prepare to publish a research note upon announcement of the results. 9 Case Study 9 Firm is running an IPO for a client and are coming to the end of the book building phase. The deal can be fully placed at.4.50. However, if the price is set at 4.40 the issue is completely allocated to tier one clients and will create a vibrant after market. Firm suggests a strike price of 4.40 and client claims that you are deliberately under pricing the deal to get the issue away and feather the accounts of your key institutional clients. They refuse to sign until you reset the final price to 4.50. 6