The Banality of Evil


New York – Yesterday, the wires broadcasted four more arrests in the federal investigation into insider-trading. The arrested people include a sales manager at Primary Global Research (PGR), and three experts within PGR’s network.

The evil

Following the arrests, the U.S. attorney leading the investigation said: “Today’s charges allege that a corrupt network of insiders at some of the world’s leading technology companies served as so-called ‘consultants’ who sold out their employers by stealing and then peddling their valuable inside information. The detailed allegations in the Complaint, along with the guilty plea unsealed today, describe criminal conduct that went well beyond any legitimate information-sharing or good faith business practice.”

We referred directly to the Complaint, which claims that the defendants “and others, known and unknown, unlawfully, willfully and knowingly combined, conspired, confederated, and agreed together with each other to commit offenses against the Untied States of America, to wit, securities fraud, in violation of Title 15, United States code…”

There is no doubt that criminal and corrupt acts such as stealing and illegally “peddling” inside information is condemnable. So it is to trade and make profit based on this kind of information. There is no doubt either that authorities must hound the offenders of these horrible crimes and punish them with all the weight of the law.

But is it functional (or effective for that matter), to pursue the expert network industry portraying expert networks as the villains of the story?

The media has described the ongoing investigation as “… the government’s probe into insider trading on Wall Street and how expert networking firms might traffic in private information that could give investment managers a brief edge.” (bolding out of text)

While we disapprove of the criminal acts of  illegally disseminating material information or trading based on such information, we do also believe that the expert network industry is the wrong evil to hunt.

The Banality

The Complaint discloses a number of phone conversations between various experts (employees of publically traded companies) and a manager at a hedge fund who was secretly cooperating with the authorities with the objective of exposing cases of alleged insider trading information.

The sections of the Complaint that refer to PGR, the expert network through which the experts were matched with the hedge fund manager, seem to aim at criminalizing this kind of business but the substance of the arguments do not manage to make it the real evil. Trying to keep our quotes within context, below we transcribe some sections of the Complaint that seem to suggest that the expert network (through its sales person) had meticulously crafted a system for delivering material non-public information to its clients. These abstracts show us that, while the expert network dreadfully failed to implement its own compliance policies, the conversations client-sales person do not necessarily make the evil out of the expert network.

Fleishman, the sales representative arrested yesterday, is quoted in the following segment of the Complaint:

“[Hedge fund manager – PGR’s client] asked Fleishman what level of detail he/she could obtain from [PGR’s] consultants, and Fleishman stated: “The service we provide is, you know, whatever you’re looking for, whether it is short term or long-term, we’ll have people.” [Hedge fund manager] then state that if the firm was trying to add value to hedge fund managers, the firm will have consultants who had a “pretty good handle in what’s happening.’ Fleishman responded that the firm ‘definitely is weighted on near term,’ and that ‘most of our clients are more focused on the quarterly trends.’”

A number of the conversations transcribed in the Complaint resemble the above, where a client is asking for unique service and products and the sales person is promising heaven on earth.

Some media outlets suggest that the individuals use coded language in the conversations. But, can you really asume that a sales person is using coded language when he promises his clients that his firm can help getting whatever the client wants, or sais that “I mean, that’s our, that’s our sales point against [competitor], right?”

Who has not heard a client asking for something along the following lines, and the sales person responding accordingly? (from the Complaint):

“[Hedge fund manager – PGR’s client] explained, ‘I mean, that’s my job to figure out what to do with the stock,’ and Fleishman said, ‘Yeah.’… [Hedge fund manager] explained to Fleishman that he gets access to ‘all of the sell-side research… Everybody gets that and that’s not necessarily something that’s uh, actionable today… you can pretty much assume, I see all that. So then, the differentiator is the proprietary information. Where can I have an edge? And you know I have my own sources. I have a kind of my, you know, a lot of people I talk to on a regular basis. I don’t just rely on you guys,’ and Fleishman responded ‘Yeah.’, and [Hedge fund manager] continued, ‘Or you know, somebody else, whatever… I got my own. So sometimes I’m looking for a piece of information that kind  of puts me over the edge and take a position in the stock, one way or another.’ At that point Fleishman state, ‘Yeah, like validate something you heard from one of your own contacts,’ and [Hedge fund manager] replied ‘Yeah, exactly. Yeah.” And Fleishman finished saying ‘Right, yeah, um-hum.”

Conversations released in the Complaint that involve the expert network sales representative seems to reflect not more than a client demanding good service and a sales representative playing the game. It is up to the authorities now to decide who should be punished for what. But if the real goal is to stop, deter and punish illegal insider trading information, an overtly accommodating sales representative and one expert network who failed to enforce its own compliance policies, will not do the trick.

The Real Evil

Wrongdoing there was. The Complaint evidences that material non-public information might have indeed been illegally transmitted by employees at public companies to investors who might have acted on that information. The culprits must indeed be punished.

Furthermore, Primary Global Research failed to enforce its own compliance policy (which is explained at length in the Complaint). The culprits must also be punished. This one firm and its wrongdoings, however, do not speak for the entire industry. Expert networks are designed precisely to help investors obtain legal information within the framework of the law. And if run accordingly to the law and to their own internal compliance policies, these networks would actually deter and prevent future cases of insider information trading.

Legal action is needed to punish past acts and to deter future wrongdoings related to insider trading information. But to choose a banal evil (i.e. an expert network that failed to enforce its own policies) will not necessarily lead to ending criminal acts and to improve practices in the industry.


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