Hedge Fund Question of the Week – Winter Edition – No. 6

By Tom Hardin, Tipper X Advisors

What is the second recent development that merits heightened attention for insider trading?

Answer (Part 2):  Political consultants.

Consider that the executive branch of the U.S. government arguably holds the largest repository of MNPI in the world.  Misuse of this information also goes beyond insider trading – the recent hedge fund cases involve stealing property of the US government and/or wire fraud.  

With the stakes so high, here are a few observations:

1.  Training is key.  It can be difficult for an analyst to discern whether a consultant is making a prediction (generally acceptable) or passing along actual knowledge (problematic).  Keep in mind that former government employees turned consultants LOVE being right.

2.  Consider implementing a risk-based approach to chaperoning calls with consultants.  For example, research on an upcoming go/no-go government decision is higher risk than seeking insights on who might win the next presidential election.

3.  Pay particular attention to healthcare consultants.  In my experience, these consultants continue to be a massive risk. Vendors continuously recruit former government staff to keep up with the revolving door in DC, which in turn puts pressure on a vendor’s quality controls over vetting and training.