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Case Synthesis

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Name: Wong Ka Yan UID: 3035104544 Assessment 2- Case Synthesis: Morgan Stanley 1. Basic Empirical Facts of the problem Du Jun, former Morgan Stanley managing director was jailed for seven years for trading with inside information. He brought shares of the Chinese commodities trader after realizing the proposed acquisition of oilfield assets while he was helping it to sell bonds. He was then ordered to compensate HK$23.9 million to investors who sold him shares in 2007 after his conviction with his assets frozen by SFC at the same time. 2. Causes and Antecedents 2.1 Breach of fiduciary duties Du’s failure to perform his fiduciary duty can be attributed to an easy access to nonpublic securities in the company. He was made privy to the details of the pitching exercise of Kazakhstan acquisition and handled a lot of confidential e-mails related to the project. Taking the advantage of this privilege, he got permitted to trade in CRH’s shares with approval from his designated manager without critical scrutiny. During the transaction, Du did not act with integrity in the best interest of his trustees. Instead he breached his duties and committed fraud by having 10 purchases of CRH shares before the announcement of its proposal and that alleged an act of insider dealing contrary to the Securities and Futures Ordinance (SFC). He even counseled and procured his wife to deal in the listed securities of CRH. 2.2 Inadequacy of internal control system

A well-developed and comprehensive internal control system should be implemented to detect abnormalities in trading activities. In 2007, Du successfully made surroundings within Morgan Stanley’s internal control system and got permitted to trade in CRH’s

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shares. He purchased in total 10 million fictitious CRH shares on four separate occasions only in a month and the system failed to adequately detect trader’s illegal transaction.

2.3 The lack of managerial oversight The lack of sensitivity of managers in checking against fraudulent roles is revealed. The designated manager was not aware of the form submitted by Du in connection with a request for approval to trade in CRH shares. He did not have an in-depth investigation in whether Du was in possession of any unauthorized information or unpublished research in the security. He ning, another colleague at Morgan Stanley stated that managers normally approve applicants’ trading of shares submission without reviewing them. What’s more, Mr. Shum, an in-house broker who handled the applicant’s trading account was also not aware of Du’s extensive trading in CRH shares (LexisNexis, 2012). 3. Warranted Actions Joint responsibilities and collaborations among stakeholders can be introduced to avoid the reoccurrence of trading frauds. 3.1 Raising the morale of traders Ethical standard should be the first priority for traders regardless of how high the qualification or knowledge he or she possesses (Investopedia, 2014). Thus, more emphasis should be put in business ethics. In the short run, financial institutions may raise traders’ morale by having motivation policies like offering rewards and promotion opportunities if employees act in the best interest of their clients while conducting business. Yet, this proposed measure may only be effective if traders are self-motivated to exercise their expertise but not for the sake of rewards. Therefore, in the long run, the government can promote moral education in the training of traders. For instance, more case studies about ethical issues can be put in the exam syllabus to consistently raise their awareness in rogue trading (Cheng, 2009). Hence, this is likely to solve the problem at its roots by influencing traders’ intrinsic values and thereby reducing their incentives to act unethically.

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3.2 Strengthening Compliance and Governance The risk detecting system should be enhanced to improve the internal control of the company. The firm could invest in new security technology that detects frequent suspicious cash flow from traders instead of merely inspecting and recording the net bases of their activities. In addition, compliance effectiveness can also be bolstered through the implementation of stricter requirements and assessment from external parties (Cheng, 2009). Nonetheless, the government can also reinforce the institutions’ internal measures by strengthening supervision over abnormal trading patterns within the companies. However, high operational cost may incur especially when investing in a new technology and hiring professionals, thus discouraging companies and the government in enforcing it. 3.3 Stringent managerial actions Relevant training should be provided to supervisors in companies in addition to the hiring of external professionals. They should be trained to have enough knowledge in detecting suspicious activities among traders and upholding compliance policies. Moreover, surveillance on employee’s investment could be conducted more regularly to monitor their investment portfolios and assets. Managers or the compliance department should also report suspicious cases of insider trading to the SFC (Securities and Futures Commission, 2014). Nevertheless, conflicts of interest tend to immerge between the institution and its compliance department. As companies’ reputation may be hindered if there are reported cases of illegal act in workplace, some devious companies may choose to turn a blind eye on their involved employees and solve the problem secretly with them. (796 words) References Cheng, J. (2009). Ex-Banker Guilty of Insider Trade: Hong Kong Judge Also Blasts Morgan Stanley for Compliance Lapses That Allowed Dealings. The Wall Street Journal. Retrieved from http://online.wsj.com/articles/SB125257422372398889

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Investopedia. (2014). Business Ethics. Retrieved from http://www.investopedia.com/terms/b/business-ethics.asp LexisNexis Hong Kong. (2012). HKSAR V DU JUN. LexisNexis Legal Updates. Retrieved from http://lexisnexishk.com/2012/09/26/hksar-v-du-jun%E6%9D%9C%E8%BB%8D/

Securities and Futures Commission. (2014). Regulation for Quality Markets: Annual Report 2013-14. Securities and Futures Commission. Retrieved from http://www.sfc.hk/web/files/ER/Annual%20Report/SFC_AR2013-14_Eng.pdf Wong, D. (2013). Ex-Banker Du Ordered to Pay Insider Gains to Investors. Bloomberg. Retrieved from http://www.bloomberg.com/news/2013-12-12/ex-morgan-stanley-bankerdu-jun-ordered-to-pay-investors.html

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