Topic: Obligations to Shareholders (investment banking)

Characters: Henrietta Bluefish, investment banker at Tremper and Co.

 

Henrietta Bluefish has been an investment banker with Tremper and Co. for four years. Since Henrietta had an undergraduate degree in biomechanical engineering and an M.B.A, degree, she was the ideal candidate to assist medal supplies companies going public for the first time. Through her contacts with her father and brother, both medical doctors, she met John Peoples, Chief Executive Officer of Pump It Up, a manufacturer of infusion pumps. Impressed by Henrietta, Mr. Peoples confided in her that he was looking for an investment banker to take his company public.

Pump It Up eventually chose Tremper as its investment banker, and the company was scheduled to go public on June 13. The initial prospectus, the “red herring,” had been released to the public. Mr. Peoples, the chief financial officer, and the head of research and development for Pump It Up had just completed a series of meetings (“dog and pony shows”) in late May with security analysts from the underwriting group.

Pump It Up is a major supplier of infusion pumps to hospitals and outpatient clinics. Its new line of infusion pumps, Vision Pump, can monitor up to 20 pumps via a computer terminal located at a nurses’ station. The FDA had approved the clinical trials of Vision Pump 60 days earlier. Vision Pump will eventually replace the company’s current line of infusion pumps, and management expects that this product will substantially increase its share of the market.

On the night of June 11, Henrietta attended a dinner party at a friend’s house. She overheard a doctor, in the course of a casual conversation, complaining about his stressful life, in particular the past month. T wo of his patients died quite unexpectedly in early May and both patients had been hooked up to Pump It Up’s Vision Pump system. The hospital’s medical staff investigated the cause of death in both cases and concluded “it was possible” that Vision Pump could have caused the deaths. Of course, the medical staff had notified Pump It Up in mid-May of the findings, and the company had assured the hospital that it would do its own investigation of the matter. Henrietta was surprised that Pump It Up had never mentioned this investigation to her firm or to any of the members of the underwriting group. After some reflection, she realized that, to protect himself, the doctor may have fabricated or distorted the incident.

On the morning of June 12, Henrietta called Pump It Up to confirm the doctor’s story. Sure enough, the company said that these incidents had occurred. Pump It Up had investigated the matter and concluded that the doctor had used the pumps incorrectly. No other deaths had occurred, and the FDA had allowed the trials to continue. Henrietta, concerned about the initial public offering scheduled for the next day, was puzzled about what course of action she should take.

Author: David Seltzer, Assistant Professor, University of Wisconsin-Parkside

What Are the Relevant Facts?

  1. The initial public offering (IPO) is scheduled to take place in less than 24 hours. It seems impossible for Pump It Up to determine the cause of the deaths in that period of time.
  2. Vision Pump will replace Pump It Up’s current line of infusion pumps. In addition, the new line should increase the company’s market share.
  3. The FDA approved Vision Pump’s clinical trials.
  4. Pump It Up did not mention to anyone outside the company that Vision Pump may have caused two deaths.

What Are the Ethical Issues?

  1. Do potential shareholders have the right to know that Vision Pump may have caused two deaths?
  2. Has the management of Pump It Up management acted irresponsibly by not divulging a potential problem to the members of the underwriting group?
  3. To what extent is Henrietta responsible for taking action or informing others of the situation?

Who Are the Primary Stakeholders?

  • Henrietta Bluefish
  • John Peoples
  • Employees of Pump It Up
  • Shareholders of Pump It Up
  • Investment banking firms
  • Patients, hospitals and outpatient clinics
  • The FDA

What Are the Possible Alternatives?

  1. Go ahead with the IPO on June 13–“do nothing” option.
  2. Postpone the IPO until the cause of the deaths has been determined–some time after June 13.
  3. Don’t do business with Pump It Up under any circumstances.

What Are the Ethics of the Alternatives?

  • Evaluate each alternative based on a “utilitarian” perspective. For example:
  1. Which alternative would provide the greatest benefit to the greatest number?
  2. How would costs be measured? How do you determine the value of the life of a patient who might die? How do you measure (for potential investors) the costs of secrecy or the benefits of disclosure concerning the investigation of the two patient deaths?
  • Ask questions based on a “rights” perspective.
  1. What rights does each stakeholder have in this situation?
  2. Which alternative would respect your rights if you were Henrietta, John Peoples, a future patient, or a future investor?
  • Approach the dilemma from a “justice” perspective.
  1. Which alternative distributes the benefits and burdens with the greatest fairness to the stakeholders?

What Are the Practical Constraints?

  1. If this underwriting goes awry, Tremper’s reputation could be ruined. In addition, it might be sued by irate shareholders.

What Actions Should Be Taken?

  1. What actions should Henrietta take? Why?
  2. Which of the ethical theories contributes most to your decision?
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