By Sanford Bragg June 10, 2022
Due diligence specialist Blue Heron Research Partners, now the largest investigative research firm focused on the buy-side, hired a former SEC Enforcement attorney as a supplement to the firm’s current CCO. Although the SEC has been focusing its attention on alternative data firms in its search for material non-public information (MNPI), the risk for primary research firms like expert networks and channel checkers remains high.
Blue Heron Research hired Scott Pomfret as a Senior Advisor to “provide guidance and support to CCO Scott Nussbaum and the company’s senior leadership”. Pomfret was the Boston-based Branch Chief in the SEC’s Division of Enforcement before acting as the CCO for hedge fund Highfields Capital Management for nearly ten years. Current CCO Nussbaum had been the senior compliance officer for long/short hedge fund Cross Shore Capital for over eight years prior to joining Blue Heron in 2019.
The move partly reflects the company’s growth as employees registered on LinkedIn have increased over 60% in the last two years. Current staffing exceeds 100 full-time staff, up from 40 when we last covered the company in 2019.
Blue Heron performs channel checks on upstream suppliers and downstream distributors and background checks on prospective employees. Like channel checkers such as OTR Global, Blue Heron tends to employ former journalists as researchers, leveraging their abilities to elicit information from disparate sources. Beginning in 2017 it added a public records team to conduct searches on documents such as criminal and civil litigation, media, corporate, employment, education, property and news coverage, which complements the firm’s core journalistic approach to research.
Blue Heron Research Partners was founded in 2005 by David Rynecki, who left a job as senior writer for Fortune magazine to start the company. Core clients are long/short hedge funds and private equity/venture capital firms.
Although Blue Heron Research Partners does channel checks, it also conducts management due diligence. The firm’s diverse set of due diligence services is opportune because alternative data has been encroaching on the role traditionally played by channel checkers. OTR Global remains the largest channel check firm, but, unlike other forms of primary research such as expert networks, OTR has not been growing (chart below).
Blue Heron’s ongoing investment in compliance is also opportune. Although SEC rattled alternative data providers with its enforcement action against App Annie (now data.io), primary research providers are perhaps even more vulnerable to accusations of MNPI. Much of the benefit provided by expert networks and channel checkers is offering non-public insights, so how experts are sourced, trained and monitored is critical to reducing regulatory risk. To complicate matters further, insider trading regulations differ from domicile to domicile. For example, in the US MNPI must involve a breach of fiduciary duty, a standard that does not exist in the UK and other locations.
We are seeing an explosion of new expert network firms, many of which tout their AI prowess but in practice hire armies of recent college graduates to conduct expert searches. Although much of their business is coming from consulting firms and corporates, for whom compliance is less of an issue, any work they do for US buy-side firms is subject to examination by the SEC. The influx of newbie expert networks, relatively clueless about the near-death experience the expert network industry survived a decade ago, increases compliance risks exponentially. It would not be at all surprising if the next SEC enforcement action involves a primary research firm rather than an alternative data firm, proving Blue Heron’s moves to be prudent.