New Round of Insider Trading Charges Expected Soon

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New York, NY – According to Charlie Gasparino, senior correspondent for the FOX Business Network, a few of his sources explain that new charges might be imminent in the federal insider-trading investigation that became public in November, 2010.


Sources Expect Large Bust

One person who has spoken with various regulators involved in the insider trading probe says, “What I am hearing is that some very large busts are coming shortly.”  This source says the charges could include hedge fund traders, employees at expert networking firms, and industry executives who supply information to investors through these networks.  Spokespeople at the Securities and Exchange Commission and the FBI have not commented on the FOX Business Network story.

While no one is certain of either the timing, or the potential targets of these possible charges, it is not surprising that the insider trading investigation is resuming after a brief lull.  Based on a court filing released this summer, government investigators have gathered at least 300 hours of wiretapped conversations between at least 50 hedge funds and some 250 consultants or experts.


Shimoon Case Might Offer Clues

Some suggest that federal authorities are likely to be investigating leads generated from recent insider-trading cases.  One such case is the one brought against Walter Shimoon, a former senior director of Flextronics, who plead guilty in July of providing inside information to hedge funds through his association with expert network firm Primary Global. 

In the suit against Shimoon, the SEC mentioned that he had provided tips to employees of at least eleven different hedge funds.  One hedge fund that was named in court documents when Shimoon plead guilty in July was Kingdom Ridge Capital, located in White Plains, New York.  Kingdon Ridge was accused of making $560,000 in October 2009, based on Shimoon’s tips about Apple.

Another person Shimoon mentioned had received these tips was John Kinnucan, who ran a small Portland-based technology research firm called Broadband Research.  Kinnucan had purportedly hired Shimoon as a consultant to provide him insight on various companies he knew well.  Kinnucan denies that he shared the tips Shimoon provided him with his hedge fund clients.  Despite this, Kinnucan is preparing to be charged.  Through his attorney, Kinnucan has requested that if federal prosecutors are planning to charge him, that they give him the opportunity to turn himself in rather than have the FBI show up at his home unannounced.

So far, federal investigators have charged 18 in the insider trading cases brought against people associated with expert networks (for a full list, go to http://www.integrity-research.com/cms/whos-who-in-the-expert-network-investigations/.)  Of these, 16 have pleaded guilty or been convicted.  The FBI has reportedly dubbed the probe “Investigation Matchmakers.”


Likely Impact of New Charges

The resumption of the insider-trading investigation with a slew of new charges is likely to have a knock on effect for the research industry — prolonging the pain experienced by various independent research providers.  Of course, hedge funds and mutual funds are likely to be very careful of their use of expert network providers, unless absolutely necessary.  Consequently, we suspect that US based expert network providers will not see a significant pickup in revenue anytime soon. 

However, other research providers may continue to suffer as well.  Over the past nine months, a number of buy-side firms have either fired existing boutique research providers, or they have halted the purchase of new research providers based on concerns that these sources might introduce “material non-public” or “confidential” information into their investment process.  New insider-trading charges could continue to make asset managers reticent about hiring new providers unless they are convinced these firms have a solid compliance framework to protect them from receiving inappropriate information.

Over the past nine months, a few large hedge funds and mutual funds have taken precautionary steps to position themselves for such a market environment by developing extensive due diligence programs to vet both the research processes and the compliance policies and procedures of their external research sources.  We would not be surprised if an increase in new insider-trading charges won’t prompt other hedge funds and mutual funds to start conducting more comprehensive due diligence of their external research providers as well.

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