Hedge fund scandal shakes expert-network industry

With insider trading forming the crux of the current Federal Bureau of Investigation’s probe on hedge funds, financial firms begin to be wary of the once highly sought-after “expert consultations” offered by expert network service providers. Many of them have in fact suspended or have fully severed ties with these entities just to avoid being pulled into the scandal vortex.

On advice of their legal counsel, a private equity firm employee said, “We’ve completely stopped using them, indefinitely."

Industry sources said companies such as Credit Suisse opted to selectively employ expert network services by limiting them on equity research, while Citigroup planned to review its rules in dealing with these “out of network” connections.

A financial manager employee aptly commented, “It’s prudent to take a time out right now and reassess how expert networks are used.”

These cautious moves came after the barrage of raids conducted by the FBI in the last two resulted to the arrest of several consultants and employees who were part of the pool of “experts” formed by expert network firms to provide “relevant information” to financial and investment companies.

On November 24, the FBI arrested Don Chu, an executive of the Primary Global Research (PGR), for allegedly providing non-public information on technology companies to his hedge funds clients. Within a month, PGR Vice President James Fleishman was charged with fraud and was accused of facilitating the transfer of classified information.

Former SEC Chairman Harvey L. Pitt commented, “Seeing people carted off in handcuffs has a sobering effect.” On hedge funds and expert networks, he advised, “The smart thing would be, both for the people who provide these services and the people who purchase them, to have their own clearly defined rules.”

For this investigation, the Wall Street Journal reported that the Department of Justice, FBI and SEC are joining forces and are using large amounts of resources for what Atty. Preet Bharara of the U.S. Southern District of New York considers as a “top criminal priority.”