Memo to Managed Funds Association: Don’t Trade on Insider Information

There is a faction on Wall Street that is trying to paint the probe of expert networks as something other than what it is — insider trading.


I had to laugh when I read the report that the Managed Funds Association (MFA) asked federal securities regulators for guidelines on the use of “expert networks.”

Of course, the MFA is a collection of professionals such as doctors and sales people, as well as current and ex-corporate officials, typically brought together by boutique firms to provide insight to hedge funds and other investors.

They have become an integral part of the government’s vast insider trading probe that has resulted in eight employees or consultants who worked for expert-network firm Primary Global Research being criminally charged so far.

“Our members would like to know where the sidelines are,” Richard Baker, the trade group chief executive officer, reportedly complained about at an industry conference in Palm Beach, Fla., suggesting ignorance as to when a user of these experts crosses the line and goes out of bounds.

Richard, how long have you been working on Wall Street? How long have you known that trading on material, nonpublic information is illegal?

You don’t need a regulator to answer the question. Here is some free advice: If the “expert” works for a publicly traded company, provides some really really hot information about that company that it has never told anyone else publicly, and then you trade using that information, guess what? This is not legal and there is a good chance the SEC and the Justice Department will knock on your door.

And you know what else? They just may charge you with a crime.

Amazingly, this concept sounds confusing to Baker.

The reason, I suspect, is that there is a faction on Wall Street that is trying to paint the probe of expert networks as something other than what it is — insider trading.

They are pretending that the rules are changing and regulators are punishing people for previously sanctioned activities, like, say, counting customers going into stores. However, that is not what expert networks do.

Those are called channel checkers, the ones who might count cars in a retailer’s parking lot or truck loadings at a warehouse. Sometimes, an expert network could be hired to provide channel checks.

In any case, no channel checkers have been accused of crimes. And none probably will either. Rather, so far the Feds have gotten people related to Primary Global to confess to garden variety, textbook insider trading crimes, or have accused them of engaging in this kind of activity.

Several individuals, for example, were accused of providing nonpublic information on sales figures or new products for Dell, Apple and Advanced Micro Devices. In late December, Winifred Jiau, was accused of obtaining and selling inside information about public companies such as Nvidia and Marvell Technology Group to portfolio managers at hedge funds. The government then noted, for example, that Jiau had telephone conversations with two portfolio managers at separate hedge funds, during which she advised the portfolio managers of Marvell’s quarterly revenues, gross margins and earnings per share for the Marvell quarter ending on May 3, 2008.

In addition, the government alleges Jiau provided the same hedge fund managers with Marvell’s quarterly revenues, gross margins and EPS for the following quarter, ending on August 2, 2008. “Both times, the information JIAU provided was on point and accurate and preceded Marvell’s public announcement of its quarterly financial results,” the government noted. It pointed out that in her conversations with the hedge fund managers, several of which were recorded by one of the hedge fund managers, Jiau made clear that she received the inside information from an employee at Marvell.

Folks, everyone knows providing this kind of information is out of bounds. In fact, Bob Nguyen, a former analyst at Primary Global said at his plea hearing last month: “One of the goals of the firm was to recruit current employees of public companies as experts who would provide material, non-public information about their company,” including information about “revenues, suppliers and customers.”

No, Richard. No one has to reiterate what is out of bounds when it comes to expert networks. If it looks like insider information, sounds like information, and makes you feel queasy after receiving this information, guess what? It IS insider information, and if you trade on it, the Feds will tackle you and put you in prison.

You are out of bounds for even asking the question.