Tuesday, January 16, 2007
The Wall Street Journal reports (here) that the New York Attorney General and the SEC are looking at whether consulting firms that use reports from corporate employees may have been passing inside information about the companies to hedge funds and other traders. The firms, Gerson Lehrman Group and Vista Research, retain large numbers of consultants, including employees of publicly-traded companies, to report on trends in their industries. According to the Journal, the New York AG's office issued subpoenas to the firms and some hedge funds, and the SEC also has requested information from hedge funds that received reports from the consultants.
An interesting question will be whether the information supplied by a corporate employee acting as a consultant will meet the standard of "materiality" for an insider trading case. While the consultants may breach a fiduciary obligation to their employers by sharing private information, especially if they're paid and don't receive permission to do so, it is not entirely clear that the tidbits of information passed on is material to a particular company. A report on industry trends may not pertain to one company any more than another, and aggregating a number of reports from different parts of a company is unlikely to be material until the analyst (or hedge fund) puts it all together. Absent unauthorized disclosure of significant corporate information, the consulting arrangements might be little more than a source of information on a par with government and media reports of consumer trends. The Supreme Court expressed considerable skepticism in Dirks v. SEC, 463 U.S. 646 (1983), about the application of the insider trading prohibition to analysts who gather and interpret information, even when that information comes from a private source.
The presence of the New York AG's office shows that it has not slowed down since Eliot Spitzer moved up to the Governor's office, and the competition with the SEC may be continuing. (ph)