Integrity Research has done the investment industry and general public the good service of providing more lengthy excerpts from the February 8th news conference in which Preet Bharara and Robert Khuzami outlined the contours of their investigation into insider trading. At the time, most major news coverage centered on a single quote from Bharara that suggested the networks were “verging on a corrupt business model” — without qualification. The expanded excerpts provided by Integrity Research, however, provide a great deal of qualification.

Neither Khuzami or Bharara would say that expert networks are verging on corruption. Bharara, to whom the press has attributed the statement, specifically says, “There is nothing inherently wrong with or bad about hedge funds or expert networking firms.” Khuzami, who heads the SEC’s enforcement division, echoed his statement: “Today’s actions are not a condemnation of all expert networking firms or the consultants who are associated with them who provide legitimate expertise and experience to assist investors in making investment decisions, but that is not what occurred in the events underlying today’s actions.” Far from suggesting that expert networks are verging on a corrupt business model, Khuzami and Bharara understand and validate the role of expert networks in primary research.

The US Attorney and SEC’s focus is insider trading, not expert networks. Bharara later clarified that the exchange of insider information could transpire in any circumstances, and expert networks may encounter these situations just as any other circumstances might. What matters to the SEC and the US Attorney is that it’s bad people doing bad things: “whether or not it’s done through an expert networking firm or its done as a McDonalds, it really doesn’t matter.”

Why, then, did the press come to characterize expert networks as verging on a corrupt business model?

Now let me begin by making something crystal clear. There is nothing inherently wrong with or bad about hedge funds or expert networking firms or aggressive market research for that matter.  Nothing at all. But if you have galloped over the line, if you have repeatedly made a mockery of market rules, if you have converted a legitimate enterprise into an illegal racket then you have done something wrong and you will not get a pass…If you made criminal activity your business model, then business as usual has to stop or the consequences, as dozens of defendants have now discovered will be severe. There are rules and there are laws and they apply to everyone.  No one is above the law, and those who would excuse or rationalize, brazen criminal conduct of the type of alleged today, are neither friends of Wall Street nor allies of business and they are certainly not supporters of the investing public.

Preet Bharara, US Attorney for the Southern District of New York: via Integrity Research

Today’s actions are not a condemnation of all expert networking firms or the consultants who are associated with them who provide legitimate expertise and experience to assist investors in making investment decisions, but that is not what occurred in the events underlying today’s actions. We allege that the charges reveal thoroughly corrupt conduct through and through….The only thing I would add to that is if you engage an expert networking firm, you are wise to conduct due diligence, to determine whether or not public company employees are engaged as consultants, and if so, there are a variety of devices and practices, that have arisen, across Wall Street, and in many regulated entities, to ensure that material non-public information is not crossing the transom, and that you are not receiving it.

Robert Khuzami, Director of the Securities and Exchange Commission’s Enforcement Division: via Integrity Research

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