Practical analysis for investment professionals
09 January 2012

The Hildebrand Case: Ethics and the Power of Perception

“There is no truth. There is only perception.

–Gustave Flaubert

This quote came to mind after reading about the currency trades of Kashya Hildebrand, the wife of Phillipp Hildebrand, the now-former head of Switzerland’s central bank, the Swiss National Bank (SNB), and vice chairman of the Financial Stability Board, a group of central bankers that recommends bank regulations to the G-20 nations.

In August of 2011, Kashya Hildebrand, a former currency trader for a New York hedge fund, sold 400,000 Swiss francs to purchase $504,000. This transaction occurred two days before the SNB announced its intent to limit the appreciation of the Swiss franc by increasing the banks’ sight deposits, and three weeks before the SNB announced its biggest currency intervention in almost 40 years.

In an hour-long news conference on 5 January 2012, Philipp Hildebrand stood by his wife, stating that she had legal power to use the account and explaining that she bought the dollars because she considered them cheap. Hildebrand stated that, although he was initially unaware of the transaction, when he found out about it the next day, he reported it to SNB’s compliance officials and instructed his bank (Bank Sarasin) not to make any more trades without his approval. Both of the Hildebrands were cleared of any wrongdoing after an internal investigation conducted by the SNB and an external one conducted by PricewaterhouseCoopers, LLC. It should also be noted that the Hildebrands have donated the reported profits from the trades to an environmental organization.

Nonetheless, Hildebrand resigned from his position on 9 January 2012, under increasing media scrutiny. “I came to the conclusion that it’s not possible for me to deliver definite proof that my wife requested the currency transaction without my knowledge,” he said upon announcing his resignation. And that brings us back to Flaubert: It is the perception of Hildebrand that eroded his credibility and created a lack of confidence in his leadership.

This situation highlights the difference between what is legal and what is ethical. The law tells us what we “can and cannot do,” whereas ethics tells us what we “should and should not do.” Based upon this distinction, the Hildebrand case raises several questions :

  • Should Kashya Hildebrand have sold Swiss francs to purchase US dollars?
  • Should Philipp Hildebrand have canceled the trade once he found out about it?
  • Should compliance officials at the SNB have asked or forced Hildebrand to cancel the trade once they were informed about it?

Though neither of the Hildebrands is a CFA charterholder, this situation also raises the following ethical issues addressed in the CFA Institute Code of Ethics and Standards of Professional Conduct.

Material Nonpublic Information

Although Kashya Hildebrand’s trading activity has not been found illegal, the timing of her purchase suggests that it may have been motivated by material nonpublic information. Was it a coincidence the transaction occurred two days before the SNB announced it was increasing bank deposits and three weeks before SNB announced its currency intervention? According to Standard II(A), “Members and candidates who possess material nonpublic information that could affect the value of an investment must not act or cause or others to act on the information.” Why? Because this could erode confidence in capital markets and create the appearance that those with inside information and special access can take unfair advantage of the general investing public.

Duties to Clients

As the head of Switzerland’s central bank, Philipp Hildebrand’s clients are not only citizens of Switzerland, but also the global investing public. How can the guardian and steward of the Swiss franc allow his wife to trade in that or other currencies? In addition, once he learned of the trade, didn’t he owe a duty to financial market participants and the people of Switzerland to undo the transaction? According to Standard III(A), “Members and candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. Members and candidates must act of the Members and candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests.” Was Mr. Hildebrand acting with reasonable care and exercising prudent judgment by allowing the trade to go through? Was he putting his and his wife’s best interest above those of his clients?

Conflicts of Interest

Hildebrand acted appropriately by promptly disclosing the transaction to SNB’s compliance officials as soon as he learned of it, but was this enough? Was Hildebrand’s decision to increase bank deposits and then later intervene to halt the appreciation of the Swiss franc compromised by his wife’s trading activity? One of the reasons for the current uproar is that the public would never have known about this situation had an IT worker at Bank Sarasin not passed the information on to political opponents of Hildebrand, the Swiss People’s Party. Should there have been greater transparency?

Standard VI(A) states: “Members and candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. Members and candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively.”

Duties to Employers

As mentioned above, an information technology worker blew the whistle by passing along information about Kashya Hildebrand’s trading activity. Ten days later, the worker was fired by Bank Sarasin and now faces a criminal investigation. Is it fair to shoot the messenger? Although under Swiss law it was illegal for this worker to pass along confidential client information, was it unethical for him to do so? This is a situation in which ethics and the law are potentially at odds, raising many questions about the IT worker’s actions.

According to Standard IV(A), “A member’s or candidate’s personal interests, as well as the interests of his or her employer, are secondary to protecting the integrity of capital markets and the interests of clients. Therefore, circumstances may arise (e.g., when an employer is engaged in illegal or unethical activity) in which members and candidates must act contrary to their employer’s interest in order to comply with their duties to the market and clients. In such instances, activities that would normally violate a member’s or candidate’s duty to his or her employer (such as contradicting employer instructions, violating certain policies and procedures, or preserving a record by copying employer records) may be justified. Such action would be permitted only if the intent is clearly aimed at protecting clients or the integrity of the market, not for personal gain.”

What I found particularly shocking is that the Hildebrand situation has now “forced” SNB to publish its ethics code. Why would a central bank, or any organization for that matter, want to keep its ethics code a secret? What is the benefit of doing this? SNB, and not just Hildebrand, may now have to contend with a perception problem.

As investment professionals we should keep in mind that it may not be enough to follow the letter of the law. Carrying ourselves with a level of integrity that leaves us beyond public reproof assures consumer confidence in capital markets and the security of our own reputations.

About the Author(s)
Michael McMillan, CFA

Michael McMillan, CFA, is director of ethics education at CFA Institute, where he is responsible for creating, sourcing, and developing educational content for CFA Institute members and investment professionals in the area of ethics and professional standards. Previously, he was a professor of accounting and finance at Johns Hopkins University’s Carey School of Business and George Washington University’s School of Business. Prior to his career in academia, McMillan was a securities analyst and portfolio manager at Bailard, Biehl, and Kaiser and at Merus Capital Management. He is a certified public accountant (CPA) and a chartered investment counselor (CIC). McMillan holds a BA from the University of Pennsylvania, an MBA from Stanford University, and a PhD in accounting and finance from George Washington University. Topical Expertise: Financial Statement Analysis · Standards, Ethics, and Regulations (SER)

1 thought on “The Hildebrand Case: Ethics and the Power of Perception”

  1. Alex Kamande says:

    Good thinking!

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