Week 5 Discussion Forum
With no less than 300 words, post an initial reply to the question below by Thursday at 11:55 p.m. Central Time. Then please respond to at least two classmates’ post with a sentence or two about their post by Sunday at 11:55 p.m. CT. In most cases responding to the instructor posts will also count. Please note that you will not see your classmates’ messages until you create your initial post.
Online Forum Discussion:
Staci Sutter works as an analyst for Independent Investment Bank Shares (IIBS), which is a large investment banking organization. She has been evaluating an initial public offering (IPO) that IIBS is handling for a technology company named ProTech Incorporated. Staci is essentially finished with her analysis, and she is ready to estimate the price for which the stock should be offered when it is issued next week. According to her analysis, Staci has concluded that ProTech is financially strong and is expected to remain financially strong long into the future. In fact, the figures provided by ProTech suggest that the firm’s growth will exceed 30% during the next 5 years. For these reasons, Staci is considering assigning a value of $35 per share to ProTech’s stock.
Staci, however, has an uneasy feeling about the validity of the financial figures she has been evaluating. She believes that Protech’s CFO has given her what he believes are “quality financial statements”. Yesterday Staci received an email from a friend, who was an executive at ProTech until he was fired a few months ago, that suggests that the company has been artificially inflating its sales by selling products to an affiliate company and then repurchasing the same items a few months later. At the same time, Staci received a memo from her boss, Mr. Baker, who has made it clear that he thinks the ProTech IPO can be extremely profitable to top management “if it is handled correctly.” In his memo, Mr. Baker indicates that the issue price of ProTech’s stock must be at least $34 per share for the IPO to be considered successful by IIBS.
Part of Staci’s uneasiness stems from the fact that a coworker confided that she had seen the CEO of ProTech and his wife at an amusement park with Mr. Baker and his wife last month. If she discovers that ProTech’s sales figures are inflated, Staci surely would assign a different value to the company’s stock for the IPO. But it will take her at least two weeks to completely reevaluate the company using different data. Staci knows that if she stays with her current analysis and she is wrong, the consequences can destroy IIBS because reputation is important in the investment banking business.
If you were in Staci’s situation, what would you do? (Please address in your initial post the following: (1) What is the ethical dilemma? (2) Should IIBS delay the Protech’s IPO until more information can be gathered about “information” Staci received recently and (3) What action do you think Staci, IIBS, or both should take?
Susanne Craig, “As Investors Win Arbitrations, Brokerage Houses Keep Paying,” The Wall Street Journal Online, March 17, 2004. (http://online.wsj.com/)
Post by Adrian Hansen
If I were Staci and I had received this same email that ‘suggests’ fraud, from a friend who has been fired for an unknown reason, I wouldn’t act on it alone. I don’t think this leads to an ethical dilemma. The fired employee could have a grudge against the company or some other bias that is leading them to share this unofficial ‘information.’ But at the same time with Staci already having an uneasy feeling about the financials of ProTech and their IPO goals, I would consider this as another indicator that would drive me to look into this alleged fraud.
I see the ethical dilemma in this story being the memo Staci received from her boss. “ProTech IPO can be extremely profitable to top management if it’s handled correctly.” This puts Staci in a place where she has to decide between her boss/job, investor interests, and the reputations of both IIBS and ProTech. Granted the top management will end up being shareholders, they won’t be all of them. If it turns out the numbers are artificially inflated I would imagine the top management would sell all their shares shortly after the IPO at the inflated price and then not care as the price dropped off significantly when the actual numbers became clear.
I feel Staci should take the time and spend the two weeks reevaluating the company with the new data and see how different the results are and if they’re actionable. Top management may lose more by waiting but their reputation would be in a better place than had they knowingly gone ahead with the incorrect release data. This may increase financial struggles within ProTech but I think it’s better for everyone than possibly being fraudulent.
Staci could always leak the unsubstantiated claims, release on time, and let the market decide if they believe it or not!
Post by Ryan Anderson
In this example, Staci is in an unenviable position somewhat similar to one we analyzed earlier in the class. In this scenario, the CFO of ProTech seems to be on the up and up, so while it is possible there is some unethical elements here, Staci may be able to reach out to that CFO with her concerns, while at the same time asking for a bit more time to complete her analysis, citing the need for accuracy. I would, in her place, likely put in the request for additional time in an electronic memo to Mr. Baker, but also cc in someone in upper management so they are also aware. This makes Mr. Baker saying no suspect, while being completely legitimate on Staci’s side.
Part of the ethical dilemma here is that she may suspect something is incorrect, and has an obligation to her company to do due diligence in her reporting, but she isn’t sure of anything and doesn’t have proof of any wrongdoing, yet seems to be being pressured by her boss to make this happen (the same boss who may be part of an adjustment of the financial numbers). That is why I suggested she speak with the CFO of Protech, whom it seems she already has been in contact with and seems to be offering what he believes is the correct data, to get more eyes on the issue and also to not be the only source should Staci need to go above Mr. Baker on this issue.
Similar to my opinion on earlier scenarios, I feel like it is in Staci’s long-term best interest to provide to the company the best information she can. Even if her boss ends up coming after her for it, she has solid ground to stand on in respect to protecting herself, can corroborate with the CFO of the company being bought, and even if it should cost her her job, she will be able to show how she did right by the company when getting another job within her field.