How Can Hedge Fund Managers Avoid Insider Trading Violations When Using Expert Networks? (Part Two of Two)

This is the second article in our two-part series intended to assist hedge fund managers in avoiding insider trading violations when using expert networks.  The first article in the series provided a detailed discussion of the law of insider trading.  See “How Can Hedge Fund Managers Avoid Insider Trading Violations When Using Expert Networks? (Part One of Two),” Hedge Fund Law Report, Vol. 4, No. 5 (Feb. 10, 2011).  This article – the second in our series – includes a detailed summary of the factual and legal allegations in the relevant civil and criminal complaints.  In light of the importance of the ongoing expert networks insider trading investigation to the hedge fund industry, and in light of the importance of the alleged facts in understanding the investigation, this article provides a comprehensive discussion of the alleged facts.  This article is long – over 25 pages – but is important reading for anyone who wants to understand the investigation, and its implications for hedge fund managers, at a granular level.  Specifically, this article provides: links to the primary civil complaint and the eight primary criminal complaints; a chart listing, with respect to the defendants and relevant uncharged parties: name, job category, background information, civil and criminal charges and plea status (where applicable); public companies about which experts in the network of Primary Global Research, LLC (PGR) allegedly passed inside information to PGR clients; language of selected public company compliance policies; PGR revenues during the relevant period and the sources of those revenues; compensation of PGR experts and employees; and the sources of information included in the criminal complaints.  The core of this article is a series of detailed summaries of the material civil and criminal allegations against the various defendants.  The allegations are organized by defendant, and for each defendant, are listed chronologically.  Also, for each allegation, we have included a citation to the specific paragraph of the specific complaint containing the allegation.  (For HFLR subscribers that wish to undertake a review of the original documents, these citations, along with our links to the relevant complaints, will save hours of research time.)  Our summaries of the factual allegations focus on the specific information allegedly conveyed by PGR experts to hedge fund managers, the timing of communications relative to public earnings announcements, the methods and channels through which information was communicated and the interconnections between the nine documents under analysis.  This article is a significantly expanded version of a prior article published in our March 11, 2011 issue.  See “The Hedge Fund Law Report Provides Due Diligence Roadmap for Institutional Investors Examining Use by Hedge Fund Managers of Expert Networks,” Hedge Fund Law Report, Vol. 4, No. 9 (Mar. 11, 2011).  For HFLR subscribers who have read that prior article, we have included in this article a redline highlighting the new information in this article.  Also, it should be noted that this article focuses on the civil and criminal allegations relating to trading in shares of public technology companies based on material nonpublic information allegedly obtained via one expert network firm or its employees or experts.  This article does not cover another category of complaints involving drug trials and alleged insider trading allegedly facilitated, directly or indirectly, by expert networks.  However, the HFLR has covered those other matters.  See “Massachusetts Commences Civil Securities Fraud Enforcement Action against Hedge Fund Investment Adviser Risk Reward Capital Alleging that the Hedge Fund Traded on Inside Information Provided through an Expert Network,” Hedge Fund Law Report, Vol. 4, No. 10 (Mar. 18, 2011); “SEC and DOJ Commence, Respectively, Civil and Criminal Insider Trading Actions Against a Doctor Who Allegedly Tipped Off a Hedge Fund Manager to Impending Negative Information About a Drug Trial,” Hedge Fund Law Report, Vol. 3, No. 44 (Nov. 10, 2010).

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