Recent high-profile prosecutions, including the Galleon
and “expert network
” criminal cases, have once again reminded the investment community of the perils of trading on material nonpublic information, or “MNPI.” These cases have been sensational, but they have not made new law. At the heart of each case was MNPI that unscrupulous traders allegedly knew had come from within the public companies whose shares they traded. The focus on expert networks, however, has placed a spotlight on how hedge funds and other investment professionals conduct their investment research. Many firms have reacted to this new reality by reconsidering how they use industry experts and by fashioning policies to address these latest concerns. This is an important step, but investors must also anticipate new issues that will arise in the future from today’s heightened focus on investment research. In a guest article, Michael A. Schwartz, a Partner at Willkie Farr & Gallagher LLP, starts by discussing “inside” versus “outside” information. Schwartz then analyzes – via a hypothetical that can easily describe a real-world situation – the circumstances in which information obtained by a hedge fund manager from an expert about one company may prohibit trading by the manager’s funds in securities of another company in the same industry. This article is important in understanding the implications of recent insider trading enforcement activity for day-to-day investment research by hedge fund managers.