FrontPoint Gets the Point

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New York – Yesterday, the SEC announced that it had filed a complaint  and begun litigation against a medical researcher who is charged with tipping information about a clinical trial. The SEC charges that Dr. Yves Benhamou breached his confidentiality duties to Human Genome Sciences, by releasing material nonpublic (and negative) information about a clinical trial for the drug Albuferon prior to the drug company’s public disclosure.  The information was fed to a hedge fund called FrontPoint Partners, which sold its holdings in Human Genome Sciences ahead of the public disclosure that one person involved in the trials had died.  FrontPoint Partners is in the process of being spun out from Morgan Stanley. Neither Morgan Stanley nor FrontPoint are named in the complaint.

While the SEC complaint does not name any defendants other than Dr. Benhamou , it indicates that there are six hedge funds, listed as Hedge Fund 1 through Hedge Fund 6, listed in the complaint.

The question from Integrity’ perspective is whether there was any intermediation of the information through an expert network. After the uncertainty associated with the Galeon Group litigation of a year ago. The Galleon insider trading scandal did not adversely impact demand for expert networks, as investors and regulators came to view their compliance processes and audit trails as beneficial. Expert networks are organized groups experts that offer to provide contact between investors and experts, typically through telephonic conversations. There is no evidence of Expert network involvement in any of the news stories, or within the SEC Complaint.

What contradicts the idea of the involvement of an expert network is that the Hedge Fund manager appears to have had a personal relationship with the doctor. Of course, this does not mean that the two were not introduced through an expert network. In fact, the involvement of an expert network, with sufficient compliance practices, might be more effective at limiting this kind of information leakage. Recall that Raj Rajaratnam (Galleon) had his own network of experts, which had little or no compliance practices, rather than utilizing a formal expert network like Gerson Lehrman Group or Coleman Research, that do have well developed compliance practices.

The concern is that expert networks will be impacted by increased regulatory scrutiny and that investors will back be scared away from talking to experts for fear that they be seen as seeking material nonpublic information.  Over the several days it will become clear as to the role, if any, an expert network had to play in this drama.

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