New York – Jail time, fines, court trials: these are the issues potentially facing those arrested in the insider trading probe currently being conducted by federal prosecutors. If you were to ask any of the former Primary Global experts or employees currently sitting in a jail cell or out on bail whether their alleged illegal actions were worth it now, chances are they would say no. But what caused them to (allegedly) act that way in the first place? How much incentive did they have? Interestingly, before the insider trading scandal became front page news, a similar question was asked of Integrity Research on a number of occasions, namely: “What is the average price to pay an expert from an expert network?”.
The first thing to examine may be what gaining insider information is worth to asset managers themselves. It has been reported in a number of articles that one hedge fund was able to turn a $820,000 profit from the tips they received from the experts. A tidy profit, but one that may pale in comparison to what Galleon must have been making if the following excerpt is true:
[Former McKinsey & Co. consultant Anil Kumar]pleaded guilty to insider-trading charges and told the government Mr. Rajaratnam [of Galleon Group] paid him as much as $2 million for a takeover tip. Mr. Rajaratnam denies the charges.
The $820,000 figure seems fairly substantial; however it becomes less so when the fees paid out to the experts are factored in. In the past, Integrity has found that the average price for a consultation with an expert seems to be about $1,000 per hour of conversation. This finding is backed up here, with the quotation, “[Expert networks] rely on a network of employees and others who sometimes charge $1,000 or more an hour to share information with investors.”
Of course, not all of this money went to the experts. One of the arrested experts, Manosha Karunatilaka, a manager at Taiwan Semiconductor Manufacturing Company North America, earned about $200/call. Some of the discrepancy in payment was administration costs for the expert network itself, and some of it was paid in salary to the expert network employees. For example James Fleishman, former salesman for Primary Global, reportedly earned about $275,000 a year in 2009 and $310,000 a year in 2008.
What is also interesting to look at is the discrepancy in payment that some of these experts received. Figures range from the $200,000 that Mark Anthony Longoria, a supply chain manager for Advanced Micro Devices Inc., was paid between Jan. 2008 and March 2010 (about 27 months) to the $22,000 that Walter Shimoon, a senior director of business development at Flextronics International, received for his tips between Jan. 2008 and June of 2010 (about 30 months). Manosha Karunatilaka, reportedly earned about $35,000 between January 2009 and June 2010 (about 30 months). Winifred Jiau, a California technology industry executive, reportedly was paid $200,000 for her information, and Daniel DeVore, a global supply manager at Dell Computer, received $145,740 in compensation for his time. Judging by the other figures listed, Mr. Shimoon and Manosha Karunatilaka certainly have to be feeling cheated by the whole thing.
These payment figures are supported by assistant director of the FBI Janice Fedarcyk’s comments that, “The more than $400,000 the firm paid the four ‘consultants,’ merely to participate in phone calls with firm clients, is an indication of the value placed on the information”.
Of course the question of how much experts sourced through expert networks can’t be answered with certainty from these reported fees. One would hope (and assume) that these were extraordinary cases and that the fees paid to these experts can not be extrapolated to the larger industry. Nevertheless, an examination of the fees paid shows the value that asset managers place on the opinions of these experts.