Rules of the Stock Exchange of research can be affected by U.S. trade probe

Rules for research analysts of stocks will probably not be affected by the U.S. research insider trading has resulted in the arrest of an "expert network" of employees, securities lawyers and law professors said.

A technology specialist Asia in Primary Global Research LLC, which matches investors with industry experts, was accused of leaking inside information within the framework of U.S. Attorney General Eric Holder, called a "very serious "criminal investigation of illegal operations on Wall Street. Researchers have assaulted three hedge funds and money managers including Janus Capital Group Inc. said

The shares, which are an extension of federal cases filed last year that have produced 14 convictions, raising questions about whether regulators are redefining what constitutes legitimate research value, especially the practice of digging small pieces of information to create a better understanding of a company, industry or trend. That's probably not the case, according to lawyers and academics.

"I do not think the rules are changing," said David S. Stone, head of corporate and securities practice at Neal, Gerber & Eisenberg LLP, a law firm in Chicago. The Securities and Exchange Commission focuses "on a different group that had not been in the spotlight."

While researchers have not detailed what they are examining his work has had an immediate impact on research practices on Wall Street, said Michael W. Mayhew, founder of Integrity Research Associates LLC, a New York firm that tracks trends in research investment.

Business Positions

expert networks have become an industry with $ 450 million to U.S. $ 500 million in revenues last year, estimates of Mayhew. The offensive has caused much of their business away, Mayhew said.

"The use of their services has been suspended or stopped, because their customers are concerned," he said.

The growth of networks of experts - from eight companies a decade ago to 40 today - is part of a campaign by hedge funds and other investors to be more aggressive about collecting information. Not the idea of networks of experts that may be illegal, but how they are used, and in particular investors to consult the experts.

"Analysts have become very sophisticated," said Perrie Weiner, international co-chairman of securities litigation at the law firm DLA Piper LLP in Los Angeles. "The question is: When you have expert analysts dig deeper than the average of analysts to dig, how far they have dug too far?"

Chu, Kinnucan

Don Chu Ching Trang, 56, an expert in wireless broadband and the World Elementary employee, was arrested Nov. 24 on charges that he provided inside information to a hedge fund manager who was cooperating with the government. Chu, who had worked at Mountain View, California-based company for seven years, was fired, said Dan Charnas, a spokeswoman. Chu James DeVita Attorney has refused comment.

The Federal Bureau of Investigation questioned John Kinnucan, who heads the broadband Research LLC in Portland, Oregon, and obtain most of their information by talking with people who do business with companies. Kinnucan, 53, said the FBI asked him to secretly tape a conversation with a client manager funds that were intended. He refused and has spoken out against the government's tactics.

"The Justice Department clearly wants to penalize retroactively research activities have been complicit tolerated by the SEC for the year," he said in an interview. "If you do not raise my voice, no one because everyone has gone underground."

"Violation of Duty"

Asked to comment on whether the definition of inside information is evolving, John Nester, SEC spokesman, said in an e-mail: "The illegal trade in insider trading is the act or causing someone to trade on the basis of material nonpublic information in violation of a right. "

Securities experts said that in recent cases, the key phrase is the rumor mills of Wall Street or in Silicon Valley "in violation of a right." - Or even parts travel agency - have always been places to gather information on public companies. This information is unlawful for the trade when it comes from someone who had the obligation to keep it secret.

The problem is not when research analysts talk to the competitors of a company or industry experts, or when hundreds of customers surveyed said Christopher Robertson, a partner at the law firm Seyfarth Shaw in Boston. legal problems when it comes to getting information from people - current or former employees, attorneys or consultants - who are forced to remain silent.

Richard Lee

Research networks routinely has a policy against connecting investors with employees of public companies if customers are looking to invest in them, "said Mayhew Integrity Research. He said that networks can not be sure their customers are being honest about their intentions.

World Primary Chu facilitated the passage of the tips on Atheros Communications Inc., Broadcom Corp. and Sierra Wireless Inc. to Spherix Capital LLC, a hedge fund run by Richard Lee Beng Choo, according to the complaint of the government. Lee had been cooperating with other research, which began in 2009, looking at the Galleon Group LLC, a hedge fund based in New York.

Chu had found a way to "privileged information", such as sales and numbers of contracts in public enterprises before posting quarterly results, according to the complaint. The information probably came from people who were obliged to keep it private.

Many other research methods are still legitimate, "said Harold Gordon, a partner at law firm Jones Day in New York.

Confusion

"There is still room for good research, fundamental," said Gordon, especially when analysts' build a picture of how a company is doing ", based on various information sources such as surveys competitors, control orders, parts or shipments load. "Go out and find information about a company without going inside," has always been allowed, "Stone said of Neal Gerber.

One area of confusion among lawyers and analysts is whether the store managers or other low-level employees can be sources of legal research data. Inside information is illegal only if it is material, which means it would be important enough to move the stock price.

"If you're really low on the food chain, the amount of information we have is that no one could say that the material," said Eric W. Orts, professor of management who specializes in legal studies and business ethics at the University of Pennsylvania Wharton School in Philadelphia.

Store Managers

The prosecution may argue that, although individual directors may not possess important information, a study of hundreds of managers yields important information that an investor can act, "said Stone.

"You go into gray areas when you start surveying managers of the stores," he said. Another question is whether the store managers or other low-level employees are forbidden by company policy to respond to these surveys and spoken "in violation of a right."

The answer may vary according to the company, and many employees probably do not know their own company policies on confidentiality, says Orts. "There needs to better inform employees about their responsibility."

With so much firepower for getting better information to investors, there may be an inevitable temptation for some people to push research to its legal limits.

"If joint work is to obtain an advantage in information," Orts said, "there are a lot of people that the temptation to step over that line."