New York, NY – Six weeks ago, the WSJ published a story indicating that the New York Attorney General’s office was investigating whether consultants paid by expert network providers, Gerson Lehrman and Vista Research, may have inappropriately disclosed important information about the companies in which they work.
However, several market sources have told us that the Feds have now jumped on the “expert network” bandwagon. According to sources familiar with the situation, the US Attorney’s office has recently initiated an investigation of their own into the way professional money managers have been using research services like Gerson or Vista to obtain access to material nonpublic information.
In fact, we hear that several money management and hedge fund clients have also been contacted by the Justice Department, requesting information on how these investors have used these expert network services.
Previous Legal Challenges
This latest investigation comes on the heels of several SEC investigations into whether hedge funds have been able to create an “edge” by solicting nonpublic information by using research firms like Gerson or Vista.
In August 2005, a Seattle Times investigation found at least 26 cases in which doctors had leaked confidential and critical details of their ongoing drug research to institutional investors, including hedge funds — in many cases by using expert network services.
Procedures to Prevent Insider Information Leakage
Both Gerson and Vista have implemented procedures and processes designed to prevent their consultants from sharing information they should not provide. For example, both Gerson and Vista require their consultants to sign agreements where they agree to comply with the rules established by their employers, as well as reminding consultants and clients not to discuss confidential or restricted information.
Gerson, however, has invested heavily in developing various technology solutions to help their consultants, and their clients, disclose and avoid potential conflicts. One such system categorizes and tracks all disclosed restrictions and maps these against a consultant’s potential projects. In addition, Gerson Lehrman also maintains a database of company preferences with respect to the participation of their employees in outside consulting projects. This gives them the information and tools to make sure that consultants are not engaged in conflict with their employers own policies.
Up until now, the various investigations have not had a significant negative impact on Gerson, Vista, or the rest of the expert network industry. In fact, a cynic might conclude that these legal inquiries have actually helped these businesses in a perverse way as some clients have become more convinced of the value of these services. However, at some point, the legal risk of doing business with Gerson or Vista given the DOJ and SEC investigations could deter some clients from starting (or continuing) a relationship with these expert network providers.