Calculating rates of return really isn’t that difficult. And while we may debate whether returns should be calculated using money-weighting or time-weighting, such issues pale in comparison with the broader aspect of ethics.

I must confess that I initially thought that the Certificate in Investment Performance Measurement (CIPM) Program’s emphasis on ethics seemed a bit excessive. And perhaps the exam questions could be geared more to the issues and situations that performance analysts and performance heads are more likely to encounter. But the issue of ethics shouldn’t be ignored. We seem to be reminded of this on a fairly regular basis.

Yesterday’s Wall Street Journal has an article on Raj Rajaratnam and his Galleon hedge fund. Recall that Mr. Rajaratnam has been accused of trading on inside information. His prowess at building relationships, which allegedly resulted in him gaining access to confidential information, allowed him to build a successful business and amass a fortune of more than a billion dollars.

Galleon’s returns were apparently quite impressive. And one might not find any fault with the accuracy of the valuations or the return methodology employed. But what is the value of the returns if, as has been suggested, they reflect the results of illegal activity?

What is the responsibility of the performance analyst or manager, should they have reason to believe that the returns reflect illicit activity? Perhaps questions like these should be added to the CIPM program. What would YOU do, if you had reason to believe that the firm’s results were arrived at through illegal means? Something to ponder, yes? 

p.s.,We are investigating another fraud case which might involve a firm that claimed compliance with the Global Investment Performance Standards (GIPS(R)). We will provide details once we’ve done further vetting of the information we’ve seen so far.