It
is July 21, 2009, and one Wall Street hedge fund manager has a sudden
change of heart. Having bought more than 1m shares in the giant
technology company AMD over the past two weeks, the trader loses
confidence in his bet and swiftly dumps a third of his stake.
The
volte-face immediately looks shrewd. As the markets close that evening,
AMD makes a quarterly earnings announcement admitting to a $330m
(£201m) loss and a 13% drop in revenues. One day later, AMD shares
slump 13%, meaning the hedge fund manager had avoided losses of at
least $140,355.
Despite appearances,
the unnamed trader's move may have been neither clever nor lucky: in
the hours preceding AMD's announcement, the seller had conducted a
10-minute phone call with one Mark Anthony Longoria, who is AMD's
supply-chain manager.
That case is now part of the huge
insider-dealing inquiry fixating Wall Street, which became even more
sensational last week when the US securities and exchange commission filed civil charges against Rajat Gupta, the former head of the management consulting firm McKinsey.
Gupta,
who denies any wrongdoing, is alleged to have passed corporate secrets
learned as a board member of Goldman Sachs to Raj Rajaratnam, the
founder of the Galleon hedge fund, whose own trial on several counts of
fraud and insider trading is due to start on Tuesday.
Insider
dealing is as old as markets themselves and the Financial Services
Authority, the UK regulator, said there were "abnormal pre-announcement
price movements" before 30.6% of 2009 takeover announcements. While
Gupta's name makes the US inquiry among the highest-profile pursuits of
insider traders since the groundbreaking Wall Street investigations of
the 1980s, what is really unusual about this crackdown is how the likes
of Longoria have become embroiled in the controversy.
Plea bargaining
The
44-year-old from Round Rock, Texas, made the fateful AMD call while
moonlighting as a paid consultant for Primary Global Research (PGR), a
so-called "expert network" firm that matches industry experts with money
managers looking for informed corporate news. Court papers state that
Longoria, who is plea bargaining, was paid $300 an hour to provide
information to PGR clients and, from January 2008 to March 2010,
received more than $130,000 for his time.
Little is known about
the world of expert networks. Even the grandaddy of the sector – Gerson
Lehrman Group (GLG) – was once dubbed New York's "most valuable company
no one outside of Wall Street has ever heard of". The business
practice is perfectly legal, unless inside information is exchanged and
used, but increasingly there are suspicions that impropriety is
occurring more often than regulators would like.
In
November, one Don Chu, a PGR employee, was arrested after evidence
gleaned from wiretaps and the co-operation of Richard Choo-Beng Lee, who
had already pleaded guilty to insider trading in the Galleon case and
is now a key witness. Also that month, Yves Benhamou – a French doctor
who was reportedly part of the Guidepoint Global Investors expert
network – was charged after allegedly tipping off a hedge fund manager
with confidential information about a clinical trial.
The
questions these cases raised over the expert network industry have been
limited to the US, where many of the firms are based, and there is no
suggestion of any wrongdoing in London where the FSA privately plays
down such firms' significance.
However,
the Guardian has unearthed eight expert network firms operating within
London – with one hired "expert" claiming that he alone has conducted
"consultations" with more than 70% of the top investment banks in the
City.
Big players including GLG, Coleman Research and the
Benhamou-linked Guidepoint all operate out of London, as do other firms
including AlphaSights, CognoLink, DeMatteo Monness, ExpertView and
Informed Edge. Apart from ExpertView, none of the firms would speak
publicly to this newspaper about their industry or the impact the US
inquiry is having on their business.
Bespoke research
However,
ExpertView's founder, Martin Tripp, said: "Expert networks are a
brilliant bespoke research tool, but you absolutely have to know the
questions you can ask. We have had letters from US companies asking if
we have any of their employees on our network and to remove them if we
have. We have spent a lot of time and money getting our compliance
right. We have telephone conversations with every single expert that we
sign to the network. They are not authorised unless we've spoken to
them."
While ExpertView, which bills itself as a niche player
concentrating on "quality not quantity", says it speaks to all its
experts, that is not always true of some of the bigger players who
conduct much of their vetting online.
GLG claims to have more than
850 clients worldwide, served by 300,000 experts in sectors such as
healthcare, energy, accounting and finance. One UK-based expert with GLG
said: "You get 15 minutes' ethics training but it's very basic. They
tell you 'don't say anything if it is confidential'. It is that level. I
don't think there is much vetting. It is 'buyer beware'."
Another
GLG expert insisted said there was "quite a stringent process of form
filling", while in a recent note to clients after the industry-wide
controversy, GLG's chief executive, Alexander Saint-Amand, said: "We
believe our policies and approach are the most robust in our industry
and add significant transparency and controls over many types of
uncontrolled and undocumented methods of information-gathering that
exist outside of an expert network framework."
Still, despite
these efforts, even experts admit that problems occur. John Ansell, a
pharmaceutical consultant who has conducted over 200 consultations for
GLG over four years, added: "Only once has there been a problem. I told a
bank something based on a rumour but they didn't want to hear it. It
can happen inadvertently."
Big names accused
Last
week's announcement that Rajat Gupta, the former head of management
consulting group McKinsey, was among those charged in the securities
and exchange commission's long-running insider dealing investigation
propelled the inquiry's profile to new heights.
Gupta, who denies
any wrongdoing, is a former Goldman Sachs and Procter & Gamble
director as well as being a one-time adviser to the United Nations and
the biggest name to be directly dragged into the investigation thus
far. It is alleged he passed corporate secrets to Raj Rajaratnam, whose
hedge fund Galleon is being examined in another part of the case,
which in turn triggered charges against four further hedge fund
managers.
One-time Olympic speed skating hopeful, Donald
Longueuil, and Noah Freeman – who both once worked at $12bn hedge fund
SAC Capital – have been charged with Samir Barai, founder of Barai
Capital Management, and his employee Jason Pflaum.
Prosecutors
allege the four men swapped tips from employees of public companies
and from expert network consultants. Former hedge fund analyst Danielle
Chiesi, who compared insider dealing to an orgasm, has admitted making
$4m (£2.45m) from the illicit deals.
SAC founded by famed
trader, Steven A Cohen, has a high profile on Wall Street but the fund
has been embarrassed by names of other former employees being dragged
into the glare of this SEC investigation.Following the charges against Longueuil and Freeman the company said it was outraged by their alleged actions.
The appropriate selective orgasmic responses are attained with the realization of tax-liability that rises from implied-stealing-guarantees. Hold-up a bank, give back 15%, go on your merry-way...spasm on bro.
Anyone wondering if there is any integrity left in stock market or entire financial system is demonstrating honesty and integrity
Tip from my own expert network: Buy gold.
The focus is on "expert networks" to keep the eye off of GS, JPM etc.
Between the Expert Networks and the Fusion Centers, the little 401k folks are definitely getting sheared. Information has always been a highly valued currency and the current level of big business/government hand washing makes the old Italian fascisti look tame.
I can hear the squid-like Wall Street crowd now.
We like expert network networks they make us lots of cash and the Elmer Fudds eat our sells after CNBC fast money guys get the cell phone call to pump the dump.
So what's the big deal.
Not casino - it's a giant fraud organized by priviledged insiders, "utilities" and we all know who...
When I read that GS lost money on aprox 5% of trade ---> I would definitely fire of half of mid managers for such poor trading result. If you have all info from "policy makers" , you suppose to have 100% success.
Still funny thing is that, in spite of all money "invested in research" "experts" etc etc , they still did not get any further than y=ax+b type of s&p control ;-)
and only upwards ha ha ha
This is what it is these days:
http://www.youtube.com/watch?v=yCXl39fgmKg
Sorry, but we have reached the point where there is no such thing as legitimate Alpha.
WB7,
We have not reached the point where there is "no legitimate alpha". There is always going to be alpha and beta, often intertwined, but always present.
Are you really sorry WB7?
I'm just scared of what comes next.
Drano
Danielle Chiesi (Cheesy?) looks quite a bit like that death row new fish, Shawna Forde.
B-b-b-but...the markets are 'efficient'...and it's all the Fed's fault...and all these "information asymmetries" magically go away if you just abolish that pesky government with its regulations and whatnot.
P-p-p-please. If you haven't noticed already, government and it's regulators serve simply to tie the victims down so the men in the suits can step into the room to have their way without the messiness of a struggle.
These dog and pony shows are used to get indignant morons out trumpeting about how limp-dick institutions like the SEC are somehow worth their salt, when the reality is that the only people who get prosecuted are the upstarts and the outcasts. If you're 'made,' then the SEC is there to make the raping and pillaging that much easier.
Don't really think I trust the ACLU a whole lot more than the government.........
How about something on organized crime & the ACLU to back that up …
Here’s the new David Duke video … (it’s quite good) enjoy.
YouTube - Israel- The Promised Land for Organized Crime - 1 http://www.youtube.com/watch?v=2FdVck03_vc
YouTube - Israel- The Promised Land for Organized Crime – 2
http://www.youtube.com/watch?v=tZOfDE2Y4lE
YouTube - Israel- The Promised Land for Organized Crime - 3
http://www.youtube.com/watch?v=MgSvyFlggJs
***** "make sure you know what you're paying for -- alpha or leveraged beta? The former is worth paying fees, especially if you can't reproduce it internally." *****
Is it Risk on for you Leo, the bullishness is lacking here.. far from your norm.. I would honestly say get ready to buy, as the fall from these heights is due and QE-3 is just around the corner.. buy low sell high, plain english get out while the gettings good. You can buy back in later.
I can't believe it's illegal. I mean, COME ON. It's all just gambling anyway. The whole wall street thing. It's all just one big casino. What the difference between deep research and insider information.
A few years.
so you can retire earlier!
"My advice to all hedge fund investors is to always be skeptical. If it looks too good to be true, walk away."
Finally an article that I can find nothing to disagree with as it included a poke in the eye of other exchanges...balance has been restored ;-)
"Via Pension Puke"
Is what I first see every time I first look at one of Leo's articles. He's gotten better over time, but he's still not fully awake.
Probably time to start including http://www.pensiontsunami.com/ articles on ZH as well...