Probe Unlikely to Change the Rules Investors Follow When Researching Stocks

On 07.12.10, In Legal Industry, by Blake

12/7/2010

An investigation on insider trading is causing confusion among a number of investors and is also disrupting the “expert network” industry. For their part, securities lawyers, as well as law professors, say that such investigation is unlikely to modify the rules that investors must follow when they are researching stocks.

In the financial world, even just the smallest bit, yet crucial, pieces of information can earn huge rewards for investors who stumble upon them first. This is where the “expert networks” come in by helping investors checking out a company match up with anyone who can offer valuable insights on that particular topic.

“Expert networks” are firms that link knowledgeable people with investors or those who seek their expertise. This industry has experienced exponential growth, taking pride in sales of between $450 million to $500 million in the past year.

U.S. Attorney General Eric Holder said that the Justice Department is conducting a “very serious” criminal investigation regarding illegal trading activities on Wall Street. While authorities have declined to state in detail what their investigation is all about, the probe is having a tremendous impact on Wall Street research practices.

Last Nov 23, as part of an investigation started by federal prosecutors in Manhattan, the offices of three hedge funds were searched by the FBI. According to Michael W. Mayhew, the founder of Integrity Research Associates, the investigation is causing the expert networks’ business to disappear. He says, “Use of their services has been suspended or stopped, because their clients are concerned.”

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