Wall Street depends on research, and analysts at hedge fund jobs and big pension funds get paid big bucks to uncover information about companies. But just how far is too far when it comes to “research”?
That was the question posed to Stephen Bainbridge, who teaches law at the University of California, Los Angeles, in a recent article from American Public Media. It all comes in the wake of FBI agents bursting into the offices of at least three hedge funds in the past week as part of a probe into possible illegal trading.
The case involves “expert networks” who are hired by large institutional investors, including hedge funds, to brief their traders on information and analysis about companies. Top expert networks include firms such as Primary Global Research and Broadband Research.
These expert networks uncover information that obviously goes beyond the technical and fundamental analysis that a hedge fund’s own analysts would do, and that’s the sticking point. There’s no clear line of demarcation between legitimate market analysis and illegal insider trading. The legal line, according to Bainbridge, isn’t established by a statute. It’s simply the result of 30-plus years of legal precedent, and there are many grey areas.
The SEC has apparently been deliberately vague about how they define insider trading, because they did not want to give people a “blueprint” for doing it.
Bainbridge also reveals that the reason for cracking down on insider trading isn’t what you might expect. It’s not what we see in the media, that insider trading hurts investors who play by the rules. But rather that insider trading is the theft of information. And regulators do not want to permit people to steal information and use it for their own profit.
Expert networks have become a critical link in how many analysts at investment firms get access to information today. So we will all be watching the government’s case, moving forward, to see where this investigation nets out. At the very least, you need to be up on the details of this case and the outer limits of legitimate financial analysis, for any hedge fund job interviews you may be participating in.
What’s your take? Does your firm use expert networks? Is insider information rampant in the hedge fund industry? When does it cross the line from “deep research”? Add your comments below.