You’re a JD candidate. You expect it will provide for a predictable and lucrative career despite the massive price tag. However, law school hardly looks like the ticket it once was. With law firms shrinking around the country, clients insisting on flat rates, and a new wave of highly sophisticated outsourcers, both domestic and international, not only are there fewer jobs, those that do emerge are less stable and less remunerative. Whoops!

Then the news cycle begins. Expert networks, once an obscure service to a niche industry, find themselves in the middle of a string of insider trading investigations.

Major funds, such as SAC and Frontpoint, discover their employees have been behaving badly, and others, such as Incremental Capital, seem to be loose criminal outfits, bent on and organized around insider trading. Galleon’s founder, billionaire Raj Rajataranam commences a very public and perhaps very ill-advised defense. And Primary Global, a Silicon Valley specialist in connecting investors with industry experts, begins to look less like a business and more like a criminal conspiracy organized around the systematic dissemination of inside information.

Insider trading is on the tip of everyone’s tongue, and to a JD candidate, the prospect of definitional questions have emerged — questions that would cycle in a sea-change of how one considers, prosecutes and defends allegations of insider trading.

The American Criminal Law Review recently published an article called, “Expert-Networks: Crossing the Insider Trading Line,” on expert networks and made exactly this case. Drawing on the string of fifty guilty pleas and convictions, the homespun, narrative introduction painted a picture of pervasive malfeasance, brought on by the dramatic increase in scale and influence of hedge funds, and the comely accommodations of experts and their networks. Expert networks, however, did not provide the definitional issues for which the Review had hoped.

Most of the convictions did not actually include expert networks. The perpetrators relied on well-placed, personal connections on a corporate board, in a treasury department, a white-shoe law firm. Even Chip Skowron, the healthcare fund manager at FrontPoint who had been introduced to the French doctor Yves Benhamou through an expert network, seemed to favor operating outside of the network when the conversation turned toward inside information. One recalls a certain piece of surveillance that sounded more like the coaxing words of a seducer than the prim and formal introduction from an expert network: the wine sits and waits for us in my cellar!

The Review did single out the case of James Fleischman, a sales manager at Primary Global. Fleischman was convicted of insider trading, and he did work at the presumed expert network Primary Global, but the Review did not articulate any definitional differences in its analysis. Instead, it found fact-specific similarities to canonical case-law that suggest Fleischman’s interactions were subject to standard notions of misappropriation, as in US v. O’Hagan. Indeed, these similarities conveyed the conviction sought by the prosecution.

We may not have witnessed the definitional-sea-change the Review claims, but the author’s hunch is correct. The recent convictions did represent something new. While not a definitional-shift, the convictions demonstrate three changes in how law enforcement investigates, understands and polices insider trading.

First, the convictions stemmed from a wide-ranging and sophisticated investigation. It incorporated non-traditional methods, such as wire-taps, and applied them broadly, and law enforcement was patient. The resulting dragnet went wider and deeper than ever before, so it did not stop with one or two indictments. Prosecutors shocked the media and investment community with more than fifty indictments.

Second, investigators demonstrated the importance and sensitivity of expert networks in the investment research process. Primary Global would seemingly anchor expert networks to insider trading, but SEC Director Carlo di Florio deliberately separated the seemingly corrupt business model of Primary Global from the more sedate world of expert network businesses. The investigation showed what can go wrong, but it also showed that it can be done right.

Third, it reminded us that insider trading is illegal. These cases connected insider-trading to personal conduct and, more often than not, personal relationships. More than fifty indictments delivered shock and awe. Just because a conversation with a source hasn’t been logged by an expert network doesn’t mean they can probe for confidential information. It assuredly backed many would-be insider-traders away from the line.

Insider trading is one of the vagaries of the law that defies the crisp, clear rules, separating black from white. The recent investigations highlight changes in investigation and enforcement, not definitions. The vagaries, after all, are part of its magic. The past year’s wake of indictments, convictions, and media unrest have just confirmed that it’s there.

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