CHAPTER 1

Sentence 1

Bernard L. Madoff’s Ponzi scheme is perhaps the most outrageous scandal

exposed during the recent financial crisis. Madoff’s scheme is believed to have
lasted over a decade and defrauded investors of over $65 billion. He claimed to be
earning fabulous returns for investors but actually was using some of his investors’
money to payoff other investors- the essence of a Ponzi scheme. Yet Ponzi scheme
are nothing new. In fact, the shemee is named after Chales Ponzi, who perpetuated
such a scheme in the 1920s. a Ponzi scheme, also known as a pyramid scheme, is
when money raised from new investors is used to pay off old investors, thus
creating the illusion that the crook is making profitable investments. Despite the
tremendous growth in the size and number of innovations in the investment in
industry, the same old scheme duped and hurt many investors.

I think investors continue to be duped by old schemes because all participants in

the investment industry have one thing in common – the desire to make money.
Moreover, the balance between profitability and treatment of others can at times
become difficult to maintain, as investments themselves are not simple.

Sentence 2

2 review, 3 types of players in the investment industry and their roles:

- Issuers: Corporations or other entities that issue securities in exchange for
capital
Eg:
- a manufacturing corporation that issues stock to build a new plant and
expand
- the U.S. government that issues treasury notes to finance the activities of the
federal government

- Investers: Parties who seek to invest money or capital in order to earn a return
Eg:
Investors can be individuals who purchase securities on their own or via a fund
vehicle, for example, a mutual fund. Investors can be pension funds—either public
or private—designed to meet the needs of a specific group of retirees, for instance,
city and state workers (a public fund) or General Motors retired workers (a private
fund)
- Intermediaries: Firms or individuals who act to bring other parties (i.e. issuers
and investors) together in an investment transaction for fees and commissions.

Intermediaries facilitate the trade of capital for returns between issuers and
investors. Investment banks help issuers raise capital. Market exchanges provide
liquidity, the ability to execute a transaction immediately. Brokers and traders help
investors and funds buy and sell securities. Analysts aid portfo-lio managers and
investors in deciding which securities to buy and which to sell. Portfolio managers
help decide which securities to hold within a port-folio to meet risk and return
objectives. Investment consultants work with pension funds, foundations, and
universities in selecting portfolio man-agers and designing the asset allocation

Sentence 3

The balance between profitability and treatment of others can at times become
difficult to maintain, because investments themselves are not simple. There are 3
characteristics :

INVESTMENTS ARE COMPLICATED

Fundamentally, investments are payments made today for uncertain cash flows
made in the future. Money changes hands today, money changes hands tomorrow,
and money can change hands at any time in between as intermediaries take their
fees and commissions. Investors may get their money back for many years or never
get it back. Investments are technically difficult to grasp

INVESTMENTS ARE ABOUT INFORMATION

Participants who acquire more accurate information than others have an advantage
in predicting future cash flows. A vast amount of information is available to
investors to use in decision making.

INVESTMENTS ARE ABOUT RESOURCES

Remember that investments exist to provide financial resources to support

activities.

It’s easy to become lost trying to participate ethically in the investment world.
Sentence 4:
There are 4 basic principles of investment ethics:
Principle I: Ethical understanding
Principle II: Ethical use of information
Principle III: Responsible investing
Principle IV: Trust and fairness

How does each of these tie to a specific feature of the investment industry?

Principle I: Because Investments are complicated , you have an obligation not to

knowingly engage in an investment transaction that either you and others do not
sufficiently understand.
This includes knowing the underlying source of returns or fee s charged
For example, if you do not understand a complex derivative instrument, you should
not recommend it. Nor should you give the false impression that you do understand
it but are recommending against the investment. It could be a fabulous opportunity
for your client or firm! Instead, you should acknowledge your lack of expertise and
recommend that your client or firm seek other expert advice.

Principle II: Because investments are information driven, Ensure that you and
others access to relevant information and that do not misuse or distort
information in the investment transaction.
For instance, for a stock investment, relevant information would include such as
earnings growth, sales, industry conditions, and the like. Recommending a stock
purchase simply because you like the name of the company without any other
research is neither sufficient nor ethical.

Principle III: Because investments provide financial resources to others, Ensure

that you do not knowingly make or recommend investments that support
activities that harm others.
For example, in 2008, it was discovered that the Sunlu Group, a producer of infant
formula in China, had been substituting an industrial chemical (melamine) in the
formula it produced. Melamine caused the formula, when tested, to show it had
sufficient protein content for sale. Melamine was used as a cheaper alternative to
nutritional protein. The melamine-contaminated infant formula led to infant
illnesses and deaths. Here profits were more important than the danger and harm
the product posed to others. Unethical? Yes
Principle IV: Because you are dealing with others’ money either directly or
indirectly, Not to abuse the trust all others have either explicitly or implicitly
placed in you to treat them fairly.
For example, you could trade stocks in your client’s account on insider
information. While this behavior might benefit your client, you are hurting the
other investors who trade with you and implicitly trust their trading partners not to
violate insider trading laws.

Sentence 5
Unethical behavior can benefit you if and only if you don't get caught". Benefits of
being unethical: receive a lot of money, gifts, commissions, offices, contracts,
services, travel and holidays..., and any other tangible or non-tangible things of
value....

Sentence 6

First, and foremost, is the cost of living with a guilty conscience. It’s hard to feel
good about yourself when you know that you have harmed someone else by your
actions.

Second, there is the cost of being fired for unethical actions – and worse yet, of
going to jail.
Third, there is the loss of reputation in an industry that depends critically on
professional integrity. A single poor decision made in an instant can ruin your
career forever.
Fourth, there is the cost to your company and the industry. When ordinary
people believe that the industry is rife with swindlers, they are unlikely to invest.
The lack of investment capital hurts the economy and society as a whole. While
it’s not possible to quantify this cost-benefit analysis, reasonably you could
conclude that the costs of being unethical exceed the benefits.
Further, you must take personal responsibility for acting ethically. It is not
sufficient to rely on laws, professional codes of conduct, or compliance officers to
ensure that you behave ethically. Laws, professional codes, and compliance, by
necessity, work to prevent the future repeat of past wrongdoing. you should have
been convinced of that as we reviewed the history of scandals and regulations in
this chapter. But the finance industry is both innovative and technical. New
products and business models create unique opportunities for unethical actions, and
not all of them can be anticipated.

Sentence 7
Ethical behavior depends critically on your internal thought process before you
take any action.

Are you trying to justify your actions? If so, they should be a red flag

such as ‘‘who will know?’’ ‘‘they won’t understand,’’ or ‘‘nobody will notice’’ go
through your head? Only unethical actions need to be hidden.

You could apply four fundamental principles of investment ethics: Ethical

understanding, ethical use of information, responsible investing, trust and fairness.

To be ethical, you must develop a higher level of consciousness about your actions
and their consequences for both you and others. It’s important to listen to that
‘‘little voice inside’’ and pay attention to that ‘‘feeling in your stomach.’’

Do unto others as you would have them do unto you.^^

Critical thinking 1:

Critical thinking 2:

2 critical, In my opinion, there are situations where illegal behavior is ethical.

For example, if there is a murderer is threating to kill an innocent person and
another person at the scene may hit or kill the murderer (kill by accident), the
action hitting another person is illegal but ethical in cases like this.