How Will the Expert Networks Controversy Affect Gerson Lehrman?
The arrest of another expert network specialist charged with providing inside information is bad news for big firms like Gerson Lehrman Group, as it shakes people’s faith in the entire industry.
The government’s ever-widening insider trading probe over the holidays snared another specialist connected to Primary Global. Winifred Jiau, a technology expert was accused of providing hedge funds with inside information about Nvidia Corp and Marvell Technology Group. For those of you keeping score at home, Jiau, who is having trouble posting bail, was the seventh consultant or employee connected to the expert networking firm.
So far, the government’s investigation has been limited to Primary Global, a smallish expert networking firm.
But, the 800-pound gorilla in the room that no one is talking about is Gerson Lehrman Group, by far the largest firm in the industry. It has not been accused of any wrongdoing and I am not suggesting they will be in the future. But if hedge funds and other active users of expert networks become more concerned about using their services in general as more individuals from Primary Global are accused of crimes — or if additional firms are caught up in the scandal — the biggest potential loser stands to be the industry’s behemoth, which Integrity Research says accounts for 66 percent of the market, according to a comprehensive report published in December 2009.
GLG was founded in 1998 by Mark Gerson, who currently serves as the Executive Chairman, and Thomas D. Lehrman, a former co-Chief Executive Officer and one-time Tiger Management financial analyst who most recently served as the Director of the Office of WMD Terrorism at the US Department of State and previously as a member of the professional staff on the President’s WMD Commission.
Patrick Duff, formerly a Senior Managing Director and a member of the Management Committee at Tiger Management, also sits on the firm’s Board of Directors.
The firm stresses it has taken a large number of steps to try to avoid compliance issues and impropriety. “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,” says Chief Executive Officer Alexander Saint-Amand in a message on the homepage of the firm’s website.
The company is said to have 18 fulltime compliance people and 100 software developers/IT people. As a policy, it only permits one of the experts in its network to speak with the same client no more than three times in one year, and the expert cannot earn more than $2,500 in a year from a single client.
In addition, the firm has created a comprehensive network system that identifies companies, their subsidiaries and subsidiaries of subsidiaries that permit and don’t permit their insiders to participate as experts. It also posts the experts’ contracts so users of their services can see the terms of their deal and whether they receive consent from their employers. It also has a tool that allows clients to filter out experts from public companies.
The company also stresses all participating experts must annually sign a contract confirming they are able to participate and that they will not disclose confidential information to clients. The contract is available in 16 languages and dialects.
All participating experts must complete interactive compliance training every year.
Experts also are not incentivized to answer inappropriate questions. The firm stresses that if its experts cut short a call in order to honor their confidentiality obligations, GLG will pay them in full for the time they set aside.
GLG is not the only one who believes it has strong compliance. Integrity Research asserted in its comprehensive December 2009 report, based on its Compliance Ratings, that it saw Gerson Lehrman Group as the top ranked U.S. expert network provider on compliance issues, based on its ratings which measure the extent to which expert network firms have established business processes that meet or exceed its recommended compliance processes, including investment in staff and training. Second placed was followed by Coleman Research Group.
Who was mentioned third? Primary Global, its 2009 Top Pick for Expert Networks for Technology Specialists, asserting it “was well reviewed for its compliance, customer support and other services.”