We're In...

There was a story published by Reuters today talking about a former AT&T executive who has pleaded guilty to conspiracy to commit wire and securities fraud.  Alnoor Ebrahim, 57, apparently got himself involved in a highly enticing and all-too-common illegal practice over the last few years.

Besides poor ethics, this boils down to heavy use of expert networks by hedge funds, and high compensation for experts who provide information to these hedge funds.

What is an expert network?  It's an organization consisting of hundreds or thousands of industry experts who offer their consulting services in return for pay.  Over the last decade the use of expert networks grew widely, and it became an easy way for experts (who already had a day job) to consult to Wall Street on topics that money managers wanted to learn more about.

The concept is logical.  If you're a semiconductor manufacturing expert at Intel, somebody at a Wall Street hedge fund may hire you to walk through details of a new technology being pitched by a small company claiming to have an edge over existing manufaucturing methods.  The Intel engineer wouldn't have to divulge corporate secrets to add real value to the Wall Street firm in terms of providing a professional opinion on a technology.  

But another (illegal) way to use expert networks was to pay corporate insiders for information pertaining to sales trends, product releases or some other sensitive information that would be valuable to a trader.  

In this case, Ebrahim admitted to giving up sales data of iPhone and BlackBerry handsets from AT&T.  Since AT&T was, at the time, the sole US carrier for the iPhone, this data would be highly meaningful to Apple's future stock price.  Same argument goes for RIM, because AT&T was a very significant BlackBerry seller.  It would be against AT&T's policy to divulge this information to anyone outside the company, and it would be illegal to use this information to trade stocks.

But the temptation is significant for people who have access to this kind of information and are participating in expert networks.  It's easy to get paid $500+ per hour of "consulting time", when all the hedge fund manager really wants is a couple of data points.  And I wouldn't be surprised if some consultants arranged larger (separate, outside) payments in return for their consulting services (aka insider information).

Being part of an expert network is not wrong.  It's a completely legitimate way to get paid for consulting.  Here's a perfectly good example.  Say you're running a large website pertaining to a particular technology savvy audience.  You may have proprietary data about user behavior, opinion polls, and more.  This is not insider information, but could be immensely useful to an investor conducting research on a topic.  

Obviously, selling proprietary data that you have no right to sell is going to get you in trouble.  Especially when such data will move the price of a stock when it is made public. It gives someone an unfair advantage in the market.  It's illegal.