Ethics Case Study

MF Global

Archegos

Bear Stearns

New York State Common Retirement Fund

CalPERS Bribery Scandal

Commodity broker filed for bankruptcy in 2011 -> $1.6bn customer shortfall

>$11bn in bets on European sovereign debt expecting bond price to rise -> crisis worsened -> $1bn loss -> couldn’t meet margin call

CEO ignored CRO warnings and replaced CRO

Repeatedly pushed board to increase risk (threatened to quit)

Illegally transferred customer funds to broker to cover losses (violating CFTC segregation)

Principle 1 - Employees failed to voice concerns or take responsibility

Principle 3 - Lack of governance -> CEO promoted risk-culture

Principle 4 - Firm failed to disclose losses, accountable and integrity

Principle 6 - Illegal use of customer funds brroke applicable laws

Bill Hwang’s family office used heavy leverage via total return swaps to build exposure above asset level

FO is less regulated -> hid total position from counterparties

Early 2021 -> positions collapsed -> couldn’t meet margin calls

Counterpaties (large dealer banks) combined lost $10bn

Hwang was guilty of fraud and market manipulation -> sentenced to 18 years

Inflated 1.5bn portfolio into $36bn of exposure

Principle 1 - Decevied counterparties

Principle 4 - Used non-transparent disclosures and manipulated market prices

Principle 5 - Reckless behavior and excessive leverage

Principle 6 - Poor risk management

Two BS funds were heavily in mortgage-backed securities and CDOs with 10x leverage

Subprime collapse wiped out $2bn

Reputational damage triggered firm-wide run -> avioded bankruptcy by sale to JP Morgan

Managers downplayed troubles, reassured investors and claimed personally adding money

Managers redeemed funds and shorted those funds

Managers deceived exposure; claimed 10% but was 60%

Principle 1 - Withheld information and mislead communication

Principle 3 - Managers redeemed capital while seeking external capital

Principle 4 - Lack of transparency and integrity

Pay-to-play scheme -> financial firms offered bribes, political contributions and kickbacks to public in exchange for pension fund allocations

Pension fudn comptroller & adviser used placement agents as intermediaries and earned millions for directing investments

Comptroller & adviser guilty of corruption and securities fraud

NY banned placement agents / lobbyist, increased disclosure, added independent oversight

SEC placed limits on political contributions by advisers to public pensions

Principle 1 - Unethical conduct, lack of integrity, stakeholder disregard

Principle 3 - Self-interest over pension system

Principle 6 - Lack of objective decision-making

CEO took bribes from placement agent -> CEO directed investments towards placement agent’s clients

CEO falsified disclosure letterss claiming CalPERS had approved deals

CEO & Placement Agent carged on fraud & bribery charges

Strictier placement-agent rules, gift limits, enhanced transparency and oversight

Principle 1 - No ethical behavior, stakeholder disregard

Principle 3 - Created conflict of interest & failed governance

Principle 5 - Operated outside an ethical framework with misaligned reward system

Lack of appropriate checks and balances

Breaches by LPs and GPs -> failure of fiduciary duty

1 -> 1,3,4,6

2 -> 1,4,5,6

3 -> 1,3,4

4 -> 1,3,6

5 -> 1,3,5