Submitted by Roger Dadodger
Yep, the yellow water has been falling on the floors of many of Wall Street's finest hedge funds. They're all glued to their toobs watching footage of the insider trading arrest of Raj Rajaratnam, founder of Galleon Group, a prominent New York-based fund firm that manages $3.7 billion. Raj, according to allegations published in the Wall Street Journal, played it fast and loose with insider trading rules by talking to prominent executives inside publicly traded companies and to executives who had specific information on pending deals and earnings at publics. Other hedges are probably not the only ones scared out of their minds. Other fearful parties likely include Gerson Lehrman Group, DeMatteo Monness, and the thousands of "consultants' who work for them. Who are these guys and why should they be afraid of what befell Raj?
Because if this signals a new wave of enforcement of insider trading rules and Reg FD, then Raj and Galleon may only be the first bodies to fall. And everyone whose been around the alternative investment community knows that Raj was an extremely avid user of expert networks - of Gerson Lehrman Group and DeMatteo Monness, in particular. These networks are ad hoc groups of consultants pulled together by a handful of well-heeled middlemen. The consultants are billed as industry experts. Many are simply that. Others are executives at publicly traded companies who claim they can provide market color without giving out any inside information (such as this guy who works for a prominent Chinese gaming company, Giant Interactive, that has been a hot issue in a very hot sector). Still others are at privately held companies but may have access to highly sensitive information that could possibly cross the insider threshold (such as key managers or sales reps at technology distribution companies or at cell phone distribution companies such as BrightStar, which are prominent distributors of Apple iPhones).
Now, why would Raj pay these networks upwards of $1 million per year to access these expert networks and their Rolodexes? I won't answer that question as I am not a lawyer and can't judge what is and what is not insider trading. But it does seem like an awful lot of money to get market color. All of this said, the expert networks probably will not suffer much even if the SEC rains down subpoenas on them. They keep no recordings of the phone calls that transpire between their hedge fund clients and the expert consultants on their payrolls.
They claim to have no idea of what actually goes on during those calls. And, most importantly, they make the consultants sign rock-solid indemnifications before allowing them to join the expert networks and access the feeding trough that can pay out as much as $400 or $500 for easy phone work talking about an industry they already know. In other words, its the consultants who are on the legal and financial hook -- even though most of the expert networks generally mark up these calls by 100% or more and have profit margins north of 50%. So, how many of these consultants anticipated they would ever stare down at an SEC probe?
Probably none because the SEC had largely been a pussycat when it comes to truly enforcing insider trading. Gerson and DeMatteo do regularly tell their consultants and their clients not to provide or accept inside information, (In fact, Gerson forces its consultants to undergo training and subjects them to regular tests). You would think that if compliance were such a big deal then phone calls would be recorded and transcripts keep on file in order to head of exactly the fate that has befallen Raj. Oh, and they must have papers on record showing that each consultant's superior (or in some cases, the company CEO) knows what is going on and has signed off in their own hand. Um, not really. So could many of these guys be breaking NDAs for a nice hourly rate? Indeed that might be possible, although who am I to judge.
As it stands, a word to the consultants who work for these expert networks and often risk their careers for $500 dalliances with hedge fund managers making seven figure sums -- JUST BE CAREFUL OUT THERE, EXPERT NETWORK CONSULTANTS.