Mike Lang Case Scenario
It is Jan. 29, 2010, and Mike Lang, CFA, is in trouble. Lang manages discretionary accounts for Welshire Capital, a large money management firm in New York. Lang has had some problems with the account of Carol Damon, the widow of a prominent banker who left her a sizable estate.
Damon, age 80, has little tolerance for volatility and does not like to invest in small-cap stocks. However, if her portfolio fails to advance at least 10% in a given year, she calls Lang and yells at him, then writes complaint letters to various Welshire Capital officers. Damon’s complaint letters usually end up on the desk of Cynthia Silk, CFA, senior portfolio manager for Stonebridge, who oversees the work of Lang and a dozen other money managers.
Last year, Damon’s portfolio lost 25% for the year, versus a 38% decline for the S&P 500 Index, the benchmark Welshire Capital uses for all of its portfolios. Lang tried to explain to Damon that the market had an extremely bad year, and the portfolio beat the benchmark by a wide margin in large measure because Lang primarily selected large-cap stocks for Damon’s portfolio that outperformed the market. Damon said that she did not care to listen to these excuses and was not concerned about the market return, only her portfolio’s return.
The most recent complaint letter was particularly ruthless, with Damon calling into question Lang’s competence and threatening to move her account to another firm. Damon, long-time president of the Nassau County Council, further vowed to persuade four local businessmen to move their accounts as well. In total, Damon and the businessmen she plans to influence represent more than 20% of Welshire Capital’s assets under management.
In an effort to fix his relationship with Damon, Lang decides to take four actions:
- Set up a meeting at Damon’s home, at which time he will explain how important her business is to Welshire Capital and discuss changes to her investment policy statement.
- Prepare quarterly and annual reports that include the rationale for purchasing each stock and the performance of her portfolio relative to those of his other clients.
- Defend himself against her attack on his competence by discussing the grueling studies and difficult examinations required to earn the CFA charter.
- Explain to her that despite the fact that two of the mutual funds in her portfolio pay referral fees to Stonebridge, he feels both funds are excellent investments.
Lang further decides to begin using a different benchmark for Damon’s portfolio, one that better reflects the nature of the investments in the portfolio and creates a more accurate perception of portfolio performance.
While Lang is moving to sort out his differences with Damon, Silk, his supervisor, takes action of a different sort. Silk serves with Damon on the Nassau County Council, which takes up a considerable amount of Silk’s time, and considers Damon to be a personal friend. She also knows about Damon’s volatile temper and irrational expectations. She has historically tried to resolve any animosity Damon has towards Lang.
This time, Silk is concerned that Damon will make good on her threat to take business away from Stonebridge. In a phone call to Damon, Silk says she understands Damon’s unhappiness with the poor performance and promises to discuss the situation with Lang and take appropriate action if necessary. She also promises Damon shares on a pro rata basis in an upcoming equity offering the company is handling assuming the stock is suitable for Damon’s portfolio.
Later that day, Silk reviews transactions in Damon’s portfolio and determines that Lang’s poor asset allocation reduced the portfolio’s returns by a considerable amount. She then calls Lang into her office. During that closed-door meeting, Silk criticizes Lang’s handling of the portfolio and tells him she is giving the portfolio to another analyst with more experience. Before dismissing Lang, she calls the other analyst, John Van Zant, and tells him that he will be taking over Damon’s portfolio immediately, adding the warning that if the portfolio does not perform better, Van Zant will not get his bonus this year.
In his attempt to appease Damon, Lang would most likely violate the Code and Standards by:
A. defending himself against her attack on his competence by discussing the grueling studies and difficult examinations required to earn the CFA charter.
B. setting up a meeting at Damon’s home, at which he will explain how important her business is to Welshire Capital and discuss changes to her investment policy statement.
C. preparing quarterly and annual reports that include the rationale for purchasing each stock and the performance of her portfolio relative to those of other clients.
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