Wednesday, November 24, 2010


Trading Inquiry Widens to Big Firms (WSJ)

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By JENNY STRASBURG, MICHAEL ROTHFELD And STEVE EDER

Federal authorities, intensifying an insider-trading investigation, are demanding trading and other information from some of the nation's most powerful investment firms.
Hedge-fund giants SAC Capital Advisors and Citadel LLC, big mutual-fund company Janus Capital Group Inc. and Wellington Management Co., one of the nation's biggest institutional-investment firms, have received subpoenas from the Manhattan U.S. Attorney's office seeking trading, communications and other data as part of a broad criminal investigation, according to people familiar with the matter.
The Federal Bureau of Investigation also recently questioned an account manager at Primary Global Research LLC, a California company that provides "expert-network" services to hedge funds and mutual funds, people familiar with the matter say.
Such expert-network firms set up meetings and arrange calls between traders seeking an investing edge and current and former managers from hundreds of companies. The FBI is seeking information about a Primary Global consultant and his hedge-fund clients, these people say.
Executives of Primary Global, based in Mountain View, Calif., didn't respond to requests for comment. Representatives of Wellington, Citadel and SAC, which is run by Steve Cohen, declined to comment. In a letter to investors, SAC said it received an "extraordinarily broad" subpoena, that it will cooperate with investigators, and that the request doesn't suggest that "anyone at SAC has engaged in wrongdoing." Janus said in a filing that it "intends to cooperate fully with that inquiry," which sought "general information." Janus shares fell 2.8% in Tuesday trading.
Subpoenas are requests for information and don't necessarily mean the recipients are suspected of wrongdoing.

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The latest disclosures show that authorities are pursuing numerous strands in their three-year investigation. One focus is whether expert-network firms leaked inside information to hedge funds and others, according to people familiar with the matter. Another is whether independent consultants provided nonpublic information to investors, these people say.
SAC, Wellington, Janus and Citadel were among the clients of John Kinnucan, an analyst who recently was questioned by two FBI agents. The agents visited Mr. Kinnucan last month and accused him and his clients of trading on inside information, according to an email Mr. Kinnucan sent to about 20 clients. The FBI asked him to tape his calls with SAC, according to a person close to the situation. In his email, Mr. Kinnucan said he refused to tape any calls.
Still another strand of the probe is examining whether Goldman Sachs Group Inc. bankers leaked information about transactions, including health-care mergers, in ways that benefited certain investors, the people say. Goldman declined to comment.
On Oct. 26, the day after the FBI visited Mr. Kinnucan, agents visited the Primary Global account manager at his home, people familiar with the matter say.
FBI agent B.J. Kang, who was involved in last year's Galleon Group insider-trading case, asked most of the questions, which focused on an expert in the semiconductor industry who consulted for clients of Primary Global and several other expert-network firms, these people say.
Former SEC Commissioner Paul Atkins explains how stock research could become illegal.
The manager was asked about the firm's work with the expert, his pay and Primary Global guidelines regarding sharing proprietary, nonpublic information with clients, these people say. Mr. Kang declined to comment.
Primary Global's compliance policies, posted on its website, say experts "are required to keep in confidence proprietary information acquired by them," and must not "breach any agreement with their employers" by working as consultants or sharing prohibited information.
One challenge for expert-network firms is policing their consultants. Such firms hire current or former company employees, as well as doctors and other specialists, to share information with investment funds.
The consultants typically earn several hundred dollars an hour for their services, which can include meetings or phone calls with traders to discuss developments in their company or industry. The expert-network companies say internal policies bar their consultants from disclosing confidential information. But because there are so many calls and meetings with investment funds, not all are monitored, according to executives at expert-network companies.
It isn't the first time authorities have examined whether individuals working for expert-network firms have passed along inside information. The SEC and the New York Attorney General's office examined the activities of Gerson Lehrman Group, the largest expert-network firm, following a Wall Street Journal article on the company in late 2006. Both probes were dropped with no charges brought.
Those probes prompted a number of expert-network firms to beef up compliance rules, such as requiring experts to sign agreements saying they have their employers' permission to act as consultants, and saying they won't share material, nonpublic information with clients.
Executives of expert-network firms and others say such rules can't stop consultants from sharing prohibited information on private phone calls, either purposely or accidentally, when a client pressures them.
Attempts to get consent from consultants and clients to record phone calls, which some say would be a strong deterrent to problematic behavior, have fallen flat, people in the industry say.
[Expert]
"Clients have generally said they didn't want that," says Stuart Lewtan, who runs Zintro Inc, a small Waltham, Mass., expert-network firm. "These are people who generally operate in a pretty secretive way. Even if they're complying with SEC regulations, they generally just don't like to be recorded."
The current investigation has caused some hedge funds to cancel calls with experts, while others are going ahead with calls after reviewing compliance procedures with the analysts involved, lawyers and others say.
"In the short term, clients are going to be very nervous about using expert-network firms," said Michael Mayhew, head of Integrity Research Associates, a New York firm that tracks the industry and collects fees for helping investors select expert-network firms.
After news of the investigation broke on the Journal website on Friday night, some hedge funds reached out to clients to reassure them that they didn't rely on expert networks.
Vijai Mohan, founder of hedge fund Hyphen Partners LP in San Francisco, sent a letter to his investors over the weekend saying: "Hyphen purposely uses no 'expert networks,' and relies on publicly available information to draw its conclusions."
—Aparajita Saha-Bubna and Gregory Zuckerman contributed to this article.
Write to Jenny Strasburg at jenny.strasburg@wsj.com, Michael Rothfeld atmichael.rothfeld@wsj.com and Steve Eder at steve.eder@wsj.com
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