Lessons for Hedge Fund Managers and Expert Network Firms from the Government’s Criminal Complaint against Don Chu, Formerly of Primary Global Research LLC
Hedge Fund Law Report
On Wednesday, November 24, 2010, agents of the Federal Bureau of Investigation arrested Don Chu, at the time, an employee of expert network firm Primary Global Research LLC (Primary Global). (Primary Global fired Chu after his arrest.) The arrest was based on probable cause established in a Complaint filed in the United States District Court for the Southern District of New York the day prior to the arrest. This article offers a critical reading of the Complaint and its implications for hedge fund managers and expert network firms. By “critical,” we do not mean to take issue with the allegations in the complaint or the sufficiency of the evidence; the evidence appears to have been carefully collected and is persuasively marshaled. Rather, by “critical,” we mean to describe our purpose in writing about the Complaint. Here, as in substantially every article in the Hedge Fund Law Report, our purpose in writing about a particular legal document is to extract the insights and lessons that may be more broadly applicable to hedge fund managers and other hedge fund industry participants. Such articles are intended to assist our subscribers in updating their assumptions, revising their policies and procedures and tracking the concerns of regulators and prosecutors. With those and related goals in mind, this article discusses the following issues, insights and ideas arising out of the Chu Complaint: the three ways in which expert networks can facilitate the movement of material, non-public information; the ways in which expert networks, properly structured and used, can inhibit the movement of material, non-public information; the categories and timing of information allegedly communicated in the Chu matter; an important compliance suggestion for hedge fund managers that use expert networks, based on the specifics of the allegations in the Chu Complaint; the role of soft dollars in the ongoing insider trading investigation; the jurisdictional issue raised by the Complaint; and the interaction between competition in the expert network business, insider trading and insider trading law.