ANALYSIS-U.S. trading probe reveals the temptations for ‘experts’

By Guest Contributor
January 21, 2011

By Emily Chasan and Liana Baker

NEW YORK, Jan 21 (Reuters) – Expert network firms, currently the focus of a major U.S. insider trading investigation, have never had to work too hard to find midlevel corporate executives willing to moonlight as paid consultants.

With consultants earning anywhere from $200 to $1,000 an hour for a meeting with hedge fund traders, working for an expert network firm — an intermediary company that matches industry consultants with hedge funds — is an easy way for executives to pad their bank accounts.

The ongoing federal investigation is revealing that some high-demand consultants, especially ones willing to pass on confidential corporate information, were sometimes earning double their salaries by moonlighting with an expert network firm. Some of the consultants arrested so far in the investigation raked in as much as $200,000 in fees.

The high hourly fees paid by expert network firms to consultants, many of whom make only modest salaries at their full-time jobs, is raising questions about whether the potential to earn all this extra cash is what tempts some consultants to break the law and provide hedge funds with inside information.

“In a situation where somebody is making $200,000, that’s clearly more than a little bit of outside work,” said Jeff Morgan, president and chief executive of the National Investor Relations Institute in Washington. “Your average person may get enticed or sucked into this.”

A case in point is Winifred Jiau, charged by federal prosecutors on Dec. 29 with passing on confidential corporate information about two technology companies to a number of hedge fund traders and analysts.

Prosecutors in New York claim that Jiau, as a consultant with California-based expert network firm Primary Global Research, earned $200,000 in fees from hedge funds over a two-year period. That is on a par with the type of money she was making as an independent trader.

And many of her calls with hedge fund managers were brief. Prosecutors allege it took Jiau less than 4 minutes of her time to give a hedge fund manager the heads-up on what Marvell Technology Group would report as earnings for the second quarter of 2008.

It is not clear from the complaints what portion of the fees the expert network firm would have taken.

Another well-compensated consultant nabbed in the probe is Tony Longoria, a former supply chain manager for Advanced Micro Devices Inc in Round Rock, Texas. Federal authorities claim he too took in more than $200,000 in consulting fees and was one of Primary Global’s “top guys,” in high demand with hedge fund customers.

It is not known what Longoria was making at AMD. But the median salary for a typical supply chain manager with a U.S. company is $95,847, according to Salary.com, a company that helps businesses manage compensation.

INCOME ENVY

Some observers say the temptation by consultants to cheat and generate more work for themselves by passing on confidential corporate information may even stem from degree of income envy.

Indeed, in the tech sector, there are thousands of software programmers and other tech geeks who have become millionaires from cashing in on low-priced stock options. Yet by contrast, the average tech operations manager working in California’s Silicon Valley earns between $77,550 and $107,910, according to employment firm Robert Half Technology.

“There’s an element of just wanting to be important,” said Doug Freedman, semiconductor analyst at Gleacher & Co. “People want to show that they know things, almost like a schoolyard mentality.”

To be sure, not all consultants, even some of those charged with passing on insider information, get rich by working for an expert network firm.

Prosecutors claim Walter Shimoon, a former senior director of business development at Flextronics International Ltd, made a little more than $22,000 from January 2008 through June 2010, while moonlighting as a consultant with Primary Global. Authorities contend some of the information Shimoon allegedly provided to hedge funds was secrets about developments with Apple Inc’s iPhone 4.

Flextronics makes component parts for the iPhone.

Most companies have policies in place that govern the kind of part-time work in which their employees may engage. Many companies say they frown upon or outright bar employees from working with expert network firms.

At Dell Inc., where one former employee pleaded guilty to leaking information, a spokesman said its code of conduct “strictly prohibits” secondary employment of any kind that interferes with Dell employment, or uses its confidential information for personal gain. Daniel DeVore, a former global supply manager at Dell, has pleaded guilty in the insider trading probe. He made $145,750 through expert networks by charging about $300 an hour, according to court papers.

But analysts say the insider trading investigation has shown that either companies did not enforce those policies, or simply were not aware of what their employees were doing and how much additional income they were making.

“It is absolutely common to be an expert (in the technology industry) and depending on what role you are with the firm, it would be more or less likely,” said Michael Mayhew, chairman and founder of Integrity Research Associates, which tracks trends in investment research.

“If you are in purchasing, it’s more likely you will be contacted because maybe they are following the suppliers to your company,” Mayhew said.

IMPROPER COMMUNICATIONS

In the wake of the first wave of arrests, some tech companies say they are going back and reviewing their policies regarding outside consulting work. Flextronics, for instance, said it has taken steps to prevent expert network firms from hiring other employees after the arrest.

Meanwhile, other expert network firms, including the largest — Gerson Lehrman Group — say they also have procedures in place that seek to deter any improper communications between consultants and hedge funds.

GLG, for example, specifically prohibits industry experts from consulting about their own companies and has also built systems to help it identify conflicts of interest. The firm also does not allow experts to have more than three telephone consulting sessions with a client in a year, without explicit consent of their companies.

However, in anticipation of further government scrutiny, the firm has also been looking recently to hire a Washington lobbyist, according to people familiar with the talks.

Even Primary Global Research (PGR), the expert network firm that has come up the most in the probe, also says on its website that “experts are explicitly instructed to decline to comment on subjects that represent information that is confidential or proprietary to the organizations they are affiliated with.”

But when former Primary Global employee Bob Nguyen appeared in a New York court earlier this month, he told a U.S. judge that “one of the goals” of his firm was to recruit experts who would disclose confidential information to its hedge fund clients.

“Together with other PGR employees, I facilitated and participated in calls between PGR experts and PGR clients in which PGR experts provided material nonpublic information,” Nguyen told the judge after entering a guilty plea.

(Reporting by Emily Chasan and Liana Baker, editing by Matthew Lewis) ((emily.chasan@thomsonreuters.com; + 1 646 223 6114; Reuters Messaging: emily.chasan.reuters.com@reuters.net)) Keywords: EXPERTS/FUNDS

Friday, 21 January 2011 14:50:41RTRS [nN21231695] {C}ENDS

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

[...] This post was mentioned on Twitter by Aaron Pressman, Randall Mikkelsen. Randall Mikkelsen said: ANALYSIS-U.S. trading probe reveals the temptations for ‘experts’ http://reut.rs/hTIBWr [...]