Please answer the questions below based on the scenario below. The following scenario is fiction and does not represent any existing individual or company and has been created for this mid-term test. Although it is likely that answers will be shorter, please limit your answers to a maximum of 20 pages.
SCENARIO -
JP Morgan Citibank is a large international bank and member of the Federal Reserve system. It takes deposits in the U.S. which are insured by the FDIC. It also owns a registered U.S. broker-dealer, JPMCBD, with offices located only in New York City. JPMCBD provides investment banking services, including underwriting equities and bonds that will be publicly listed and offered. JPMCBD also has a group, JPMCBD Swaps, that offers and executes swaps, futures and options to be executed with its clients.
Two employees of JPMCBD Swaps have identified a potential client, Acme Company, with whom JPMCBD Swaps will want to execute a range of derivatives (futures, options, swaps, etc.). The two JPMCBD Swaps employees are Tom Jones, a recent college graduate who will be taking his first licensing exam in a few months and then will become a first year JPMCBD Swaps Analyst, and John Smith, a fully licensed JPMCBD Swaps Vice President with fifteen years of work experience at JPMCBD Swaps.
Acme Company ("Acme") is a relatively small but growing specialty metal parts manufacturing company. It recently, "went public" - having listed its shares on the NYSE last month. Acme has just begun to "go international". It is planning to ship its products to England next year. Its CEO, Mike Mark, formed Acme two years ago out of college and has been a brilliant engineer and entrepreneur. Acme's board is still reviewing the business plan to ship its products to England and has not authorized any actions to be taken to support this plan.
JPMCBD has just started a new incentive compensation plan. The plan pays JPMCBD employees a salary and bonus. Both are will be paid in cash and immediately awarded monthly. The bonus is based on the potential revenue JPMCBD can earn on transactions that its employees arrange with clients. Although most transactions enable employees to obtain 20% of the potential revenue from the transactions, JPMCBD management has decided to gain market share in foreign exchange futures and options for the Japanese Yen and Euro and has will share 60% of the potential revenue for any Japanese Yen or Euro future or option.
John Smith and Tom Jones arrange to meet with Mike Mark at Acme's small offices in Darien, CT. They present a presentation that recommend that Acme enter into a multi-stage transaction that would convert dollars forward for five years into Japanese Yen and then into Euros and then into English Pound Sterling. Mike Mark never heard of foreign exchange transactions and asked that he receive more information. Tom Jones and John Smith discussed how this was the normal way foreign exchange transactions into English Pound Sterling. They continued by stating that the NYSE would not allow any other type of transaction except this type of deal.
Mike Mark tells John Smith and Tom Jones that he is somewhat interested in doing these recommended foreign exchange transactions. Mike Mark explains that he has a son who is a junior at Washington Circle University studying business. Mike Mark suggests to John Smith and Tom Jones that he would be more interested in these foreign exchange transactions if Acme had a strong business relationship with JPMCBD. Mike Mark suggests that such a relationship would be stronger if Acme hires Mike Mark's son for the summer. John Smith and Tom Jones promise that Mike Mark's son will have a job at JPMCBD for the coming summer. With these assurances, Mike Mark takes out a pen and signs contracts that Tom Jones has brought. By signing, Mike Mark executes foreign exchange transactions worth over $100 million with JPMCBD Swaps. Tom Jones calculates that he and John Smith will receive cash bonuses from these transactions of over $20 million each.
Tom Jones is so excited about what has happened at the meeting with Mike Mark that Tom Jones calls his broker at JPMCBD and buys $100,000 worth of shares in Acme as he feels that the expansion plans will boost Acme's share price. Tom Jones calls his best friend, Joey, and tells Joey about what happened. Joey shorts Acme's shares as he does not believe that Acme will ever "go international".
QUESTIONS - Please set out and discuss:
1. Do the actions of John Smith, Tom Jones and/or JPMCBD present any regulatory or ethical issues, problems or questions? What are the regulatory or ethical issues, problems or questions?
2. Which regulators would be responsible for these issues, problems or questions?
3. Would these issues, problems or questions arise in an examination or enforcement action by these regulators? If so, set out the examination and enforcement action and process by one of these regulators and what would be the potential outcome?
4. How would you correct these issues, problems or questions?
5. What are the regulatory or ethical issues or problems for Acme, its board, and/or Mike Mark? What regulators would be involved with these? How would you address these issues or problems if you were the regulators?
6. Has Joey done anything inappropriate? If so, why?