Excellent article this afternoon from Bloomberg Businessweek covering the recent consultants from Primary Global hired by hedge funds to provide them with access to their expertise. Apparently, the SEC looked into the matter, and has decided that these consultants did not share expertise, but rather insider information, in exchange for payments of $200k or more. Allegedly, these five consultants offered information on Marvell ($MRVL), NVidia ($NVDA), $DELL, $AAPL and $AMD (not a shabby list of firms who each manage significant demand in several key tech ecosystems. Sounds like a bargain at $200k.
Interesting story, and one we're going to see more of over the next few years, as information sharing has become commonplace, and access to decision makers and key players has gotten easier to achieve. Firms like Gerson Lehrman built their business on matchmaking hedge funds, lawyers and others who need access to privileged information with the right sources. Social networks like LinkedIn and communication platforms like Twitter have lowered the barrier to connect with influential minds - many of whom are appreciating the ability to check the pulse of their related communities.
Today, anyone with a few bucks in their pockets, or more ideally with a few ideas in their mind, can reach decision makers and actually befriend them, regardless of age, socio-economic background, or credentials. The latter is what we try to perpetuate every day at StockTwits, because we do believe that anyone can have a great idea, and excellent ideas should be passed around, embraced, argued/discussed, and ultimately associated with their originator. This happens every day with the remarkable folks who live in Social Media, whether they be Fred Wilson, Howard Lindzon, Brad Feld, Jeff Hayzlett, Jeff Pulver or others.
The former however is a side effect of this new open culture - people always seek an insider's edge and will pay a handsom fee for information no one else has. VCs, Management Consultants, I-Bankers and others have always gone out of their way to bring in team members (or hire consultants) of influence who can ensure that their portfolio gets special attention from a key strategic partner. Washington Insiders often get a big payday when they leave their posts and enter the private sector for much the same reason. In today's world, its even easier to procure an expert, and many an ex-executive have found lucrative roles of this nature...
Why shouldn't hedge funds be allowed to pay insiders for semi-confidential insights that can help them profit in trading public securities? The big difference here is the requirement for corporate disclosures to the shareholders and investor community - when access is granted to a specific research professional or insight is shared over a casual cup of coffee, the government interjects (if they can prove it) because the cardinal rule of disclosure is being violated. This is why the SEC is looking into $FBOOK so seriously, as their stock is on the verge of having a properly liquid market provided via private markets - to the point that they might need to publicly share their financial statements. Insider information in the $FBOOK case, particularly for those sitting on the board and privy to financial statements and projections, provides a massive advantage to them.
As part of keeping our public markets credible and affording market participants of the chance to trade in a fair free market, we need to actively draw out insider information transfer, and encourage more open trading conversation. The best traders will still rise to the top, because they can interpret all the news/analysis and data flow quicker than competitors, and know when to close our positions. Traders who do depend on getting questionably sourced data will not succeed in the long-run, as it is hardly a scalable or legal model.