Ethics – violation or not

Mikale Natschavin, CFA, is the managing director of Blue Lotus LP, a boutique
investment bank specializing in M&A consulting in the professional services arena.
Blue Lotus also manages a fund (Xeta fund) for several institutional clients. The fund
was run by a team of four managers. During the recent economic downturn,
commensurate with the decline in the size of the fund, Blue Lotus downsized the staff.
Sandra Duff, CFA, one of the managers of Xeta, was laid off by Blue Lotus. During her
exit interview Natschavin wished Duff well and, on behalf of the firm, gave her

permission to use Xeta fund’s past performance when seeking new employment
opportunities. Duff did not mention to Natschavin or the personnel manager that she
was still in possession of a company-issued laptop. On that laptop’s hard disk, Duff
had stored several models the team had developed to pursue investment strategies.
In later job applications to potential employers, Duff included the performance of the
fund to demonstrate her success, but did not give any indication of a team approach.
After several weeks of interviews, Duff accepts employment in the currency trading
department of Sario, a large hedge fund. Duff begins to use some of the models from
her Blue Lotus laptop at her new job. Duff’s supervisor at Sario, Steve Howlett, CFA,
regularly reviews employees’ personal trading to detect violations of Sario’s written
policies regarding trading in personal accounts. Howlett finds two instances where he
believes Duff has engaged in front-running of Sario’s clients.
One of the currency trading strategies employed by Sario is based on interest rate
parity. Sario traders monitor spot exchange rates, forward rates, and short-term
government interest rates. On the rare occasions when the forward rates do not
accurately reflect the interest differential between two countries, Sario employees
place trades to take advantage of the riskless arbitrage opportunity.
Because Sario is such a large player in the currency exchange markets, its
transactions costs are very low, and Sario is often able to take advantage of
mispricings that are too small for other firms to capitalize on. In describing these
trading opportunities to clients, Sario staff suggest that “Clients willing to participate
in this type of arbitrage strategy are guaranteed riskless profits until the market
pricing returns to equilibrium.”

Question
Regarding Sario’s arbitrage trading strategies, has Sario’s staff violated CFA Institute
Standards of Professional Conduct with respect to the firm’s trading strategy or the
guarantee of results?

A)
The trading strategy and guarantee of results are both violations of CFA Institute
Standards.
B)
The trading strategy is legitimate and does not violate CFA Institute Standards, but
the guarantee of investment return is a violation of Standards.
C)
Both the trading strategy and the guarantee statement comply with CFA Institute
Standards.

pls explain what would be the correct answer of the above question and why?