Expert Networks and Insider Trading : An Introduction and Recommendation

An expert network enabled the largest insider trading scheme ever discovered and charged by the Securities and Exchange Commission (“SEC”). As complex information webs circulating money for information, expert networks are significant and relevant to the financial system, generating over $400 million in revenue annually. In the past decade, regulatory revisions to disclosure requirements and reformations to investment banking research practices have fueled the rise of expert networks. Despite recent notoriety in connection with Raj Rajaratnam's insider trading case and various insider trading convictions of expert network consultants, use of expert networks is legally permissible, as specifically acknowledged by the SEC. Nevertheless, expert network firms, expert consultants, and clients must guard against insider trading by ensuring that no information transferred is material, nonpublic, or acquired through a breach of duty. This article argues that strong compliance programs and well-written contracts protect expert networks against insider trading and regulatory investigations