Christian Mathews, CFA, is an Equity Analyst for Gupta Asset Managers (GAM), a portfolio management company based in Mumbai, India. Mathews, specializing in the beverage industry, is planning to trip to Sri Lanka to research the tea industry, Murali Premadosa, CFA, known as “Prem”, is a Research Analyst for a stock broking company, Ashoka Brokers, based in Colombo, Sri Lanka. Mathews contacts Prem to arrange visits to tea estates of publicly traded companies in the highlands of Sri Lanka.

Prem, wanting to enhance the business relationship with GAM, arranges for all of Mathews’ Sri Lankan expenses to be paid for by Ashoka. These costs include food, hotel, and transport. This arrangement is based on the understanding that all security transactions resulting from Mathews’ trip to Sri Lanka will be executed through Ashoka. Ashoka’s commissions are typically similar to its competitors’, but it can take a few extra days to execute larger volumes of trades due to Prem’s employer being new to the brokerage business. Prem sets the itinerary, with plans to visit a minimum of six Sri Lanka tea companies in two Districts. Mathews agrees to the visits and asks Prem to create a list of questions to ask the management of each company.

Mathews asks Prem to delay the release of any research report he writes on the six Sri Lanka companies they visit together until such time that GAM has had an opportunity to act on Mathews’ recommendations. Prem agrees to this arrangement.

In a meeting with a publicly listed tea company, Kandy Tea Estate, information is revealed that neither Mathews nor Prem believes is in the public arena. The information relates to the restructuring of the factory layout to make the tea drying process more efficient with less loss of tealeaf. The new layout does not require any additional machinery or personnel. Prem and Mathews see the increased efficiencies during their factory tour.

After the meeting, Prem prepares an investment research report with the excerpt shown in Exhibit 1.Exhibit 1Kandy Tea Estate Company

Date: December 2011 Analyst: Murali Premadosa Chartered Financial Analyst Recommendation: Long-term but with associated high commodity risk supported by large growth prospects for Sri Lanka. 200820092010Annual Growth Rate 　(2000-2010) India835.0848.0826.21.70% Sri Lanka305.8295.1310.04.40% Source: Universal Tea Institute Mathews is impressed with Prem’s work ethic and research abilities. Knowing GAM is looking to hire analysts for their new Colombo office, Mathews asks Prem if he would be interested in changing employers and building a research team. Prem is excited about the prospect and to show his worth to GAM, Prem undertakes the following actions at his office after normal working hours:

Action One: Creates a list of all the work he has undertaken highlighting industry exposure on his personal computer.

Action Two:Copies research reports he recently completed on the tea industry.

Action Three:Approaches a friend working at a competitor to assess his interest in joining GAM as part of his research team.

Upon Mathews’ return to Mumbai, he delivers to his clients his investment report with a “Buy” recommendation, along with tea samples he collected while in Sri Lanka. In the report, he discloses his personal holding of some tea investments he made years earlier. The next day, however, after receiving permission from GAM’s Compliance Officer, Mathews liquidates his personal tea-related investment to pay for a medical emergency.