As the Rajaratnam prosecution revealed, the “expert network” firms that produced high-level insights — allegedly by paying technology industry workers for inside information — hardly were engaging in legitimate research.

—Jim Pavia, Editor, Investment News.

It’s surprising and disappointing to see Jim Pavia commit a gross failure of analysis in his review of insider trading. The Raj case wasn’t about expert networks. It was about insider trading.

Jim boldly misstates the circumstances, figuring a relationship that he thought must exist, and failing to recognize the fact that Raj was accused of insider trading based on information obtained through personal relationships with insiders, not through expert networks.

The crimes Raj has been convicted of weren’t conducted in the open. They were committed in the shadows, outside of any formal process. His information came from personal relationships and personal sources. If anything the formal compliance systems, controls, and policies of an effectively managed expert network would have scared him off and made him think twice about pressing for inside information. Knowing that an auditable record of his interactions would be on file at the network would have reminded him of his obligations to the law and society.

Yes. Insider trading is a problem. It poisons the market in a way that suggests the “game is rigged.” But one must also learn to recognize it for what it is – bad people doing bad things. Raj was convicted for gathering inside information through  personal relationships with insiders, not through expert networks.