This whole expert consulting industry seems like a place where a whole lot of suspect stuff is going on. These are the experts that a lot of hedge funds hire to learn about certain sectors and get that “edge”. It seems like doing this “research” and “getting an edge” is actually a euphemism for insider trading.
How do you not ask these experts about the ‘confidential research’ their doing? Can’t these hedge funds ask questions that gives them a lead on what direction the research is going? When you pay to join a network and ask experts questions, I’m sure there’s a understanding that you’re going to get what you pay for. If they’re not providing good information, why would they pay an expert network?
From the NY Times:
The Massachusetts complaint portrays a sharp turnaround for Mr. Silverman’s hedge fund after he began paying Guidepoint $80,000 a year for the right to interview two experts a week. Most of them were conducting confidential research for various drug makers, the complaint said. They were supposed to talk about other things — a policy Guidepoint informs them about but does not track to ensure compliance.
Mr. Silverman’s fund, Risk Reward Capital, had lost 16 percent of its value in 2007, but after joining Guidepoint in 2008, it gained 55 percent in 2009 and 52 percent in 2010, the complaint said. State authorities also accuse him of illegal trading in another company, Ariad Pharmaceuticals, with help from unidentified Guidepoint experts, which he also denies.
To me, there seems to be such a fine line as to what constitutes insider trading and what is just research. If you’re a hedge fund, and you’re paying a company to talk to experts, aren’t you trying to get information that nobody else has?
The case involves a Columbia Professor, referred to as “Doctor 1″:
Doctor 1 talked to the money manager in June 2010 about an unpublished study of an obscure drug, according to the complaint filed by the state’s securities regulator. The hedge fund bought more than $800,000 in stock in Questcor, the company whose sole product was that drug, and saw its value soar.
But this isn’t the first time that one of Guidepoint’s experts has been involved in an insider trading case. In another case it was again a doctor who appeared to provide information about a drug trial before it became public. This from the Wall Street Journal:
Dr. Benhamou is accused of passing on insider information about the clinical trial of a drug formulated to treat hepatitis C, prompting the hedge fund to dump six million shares in Human Genome Sciences Inc., the company conducting the trial. A spokesman for Human Genome Sciences, not accused of wrongdoing, said the company has cooperated fully with the investigation and declined further comment.
How can the home gamer, the individual who’s trying to manage their own stock portfolio, compete with hedge funds or traders who are paying experts for information. The answer is they can’t. So that means you shouldn’t trade stocks? No, it means you should expect the unexpected and perhaps stick with stocks that have good fundamentals and pay a dividend. Most of the time the insider trading cases involve more risky types of stocks, like those in the pharmaceutical industry.
The insider trading cases involving these consultancy networks aren’t only about doctors though. In another case involving Guidepoint, a Dell computer global supply manager plead guilty to leaking information to clients of Guidepoint when he worked as an ‘expert’ for the company. This from Business Week:
DeVore made the confession as part of his Dec. 10 guilty plea to conspiracy and wire fraud charges in Manhattan federal court. He also said he leaked tips to clients of Primary Global Research, another research firm. DeVore is cooperating with prosecutors in their probe of insider trading on Wall Street.
“I also provided material non-public information to clients of Guidepoint and Vista,” he told U.S. District Judge Jed Rakoff, according to the transcript of his plea.
Who’s Vista you might ask? Well, that’s another expert consultancy network which Guidepoint recently acquired. That should give traders looking for an “edge” a larger selection of experts to pay for information. Nice.