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On Expert Networks, Compliance, the Drunk and the Lamppost

NEW YORK - NOVEMBER 05:  Galleon hedge fund pa...

Expert networks have been in the news a lot for the past few weeks, due to the SEC’s attempt to look for insider trading amongst hedge funds, following on their Galleon investigation (Raj Rajaratnam of Galleon is in the photo shown). The best source of information on this topic is as usual the Integrity Research blog. I wholeheartedly agree with the thrust of their commentary: expert networks replace social capital with financial capital. Investors have always sought out primary research; expert networks just make it easier. They also add a significant compliance layer, making it much easier for a fund’s compliance officer and/or the SEC to see with whom a fund spoke, and on what topic.

What’s striking to me is that the SEC is clearly investing serious firepower in looking for wrongdoing: subpoenaing many hedge funds and most of the major expert networks. However, as I said to the Globe and Mail in their piece on the topic, U.S. financial probe digs into a murky industry, "So far there is exactly one person [Don Chu of Primary Global] who works for an expert network with any specific allegations against them." Noteably, the complain against Don Chu looks like black & white insider trading.

(UPDATE: Authorities have arrested one other employee of Primary Global, James Fleishman, and several other technology company employees for allegedly leaking information. another technology company employee pleaded guilty and is cooperating with investigators.&#160. The information allegedly leaked is in clear violation of the employee’s employment agreements and agreements with the expert networks; it doesn’t undermine the basic logic of the expert network model.)

To me this lack of more accusations against expert networks is striking. If the SEC subpoenaed 15 New York restaurants, I’m sure they’d find more evidence of health code violations than they’ve found in all their recent investigation of hedge funds and expert networks.

As a more general comment, this reminds me of an old joke:

A drunk loses the keys to his house and is looking for them under a lamppost. A policeman comes over and asks what he’s doing.

"I’m looking for my keys" he says. "I lost them over there".

The policeman looks puzzled. "Then why are you looking for them all the way over here?"

"Because the light is so much better".

The US financial regulatory apparatus looks terrible now because of the Madoff scandal (which was not a hedge fund) and the 2008 financial meltdown (caused by the large banks/mortgage companies, bad regulation, quasi-government agencies like Fannie/Freddie, and consumers who took on too much debt). So now they’re focusing their investigative energies on hedge funds and expert networks, whom everyone agrees bear no responsibility for the 2008 crisis. Why? Mainly because those are two groups who do not have the regulatory sway and lobbying budget of the large investment banks. This seems like a misuse of our taxpayer dollars, to put it mildly.

I’ve given a number of presentations to senior executive groups on expert networks; below are two slide decks:

How to Earn More Consulting Revenue from Gerson Lehrman and Other Expert Networks

How Executives Can Work with Private Equity and Venture Capital Portfolio Companies..and Buy a Company with Private Equity Backing

I have spoken periodically to private equity funds on this topic also:

It’s the People: Improving Portfolio Company Valuations by Working with Operating Executives (discusses expert networks and other ways to tap outside operating executives)

Lastly, I’ve blogged frequently about expert networks. For my notes on some panels on expert networks (some of which I participated in), see:

Investorside

World Hedge Fund Summit
New York Society of Security Analysts Panel
Investorside conference
Harvard Business School Club of NY Investment Research Panel

Also, for background, see
MIT Enterprise Forum of NY: Collaborative Investing Startups
Software & Information Industry Association Panel on Content and Community

(Image by Getty Images via @daylife)

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