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SEC Enforcement Action Against Hedge Fund Managers is First Insider Trading Action in Expert Network Investigation

By Jim Hamilton

In the first enforcement action against traders in the SEC's ongoing investigation of insider trading involving expert networks, the SEC alleged that a New York-based hedge fund and four hedge fund portfolio managers illegally traded on confidential inside information obtained from technology company employees moonlighting as expert network consultants. The scheme netted more than $30 million from trades based on material inside information about such companies. Also charged with securities fraud are the technology company employees who illegally tipped hedge funds and other investors with inside information about their companies in return for hundreds of thousands of dollars in sham consulting fees. The SEC seeks a permanent injunction and also asks the federal court to order disgorgement of their ill-gotten gains plus prejudgment interest, and payment of financial penalties. With regard to three company employees who tipped the inside information to the hedge fund managers, the SEC seeks a permanent officer and director bar. SEC v. Longoria, et al., (SD NY), No. 11-CV-0753, Litigation Release No. 21844.

Robert Khuzami, Director of the Division of Enforcement, said that it is illegal for company insiders who moonlight as consultants to sell confidential information about their companies to traders, and it is equally illegal to buy that corruptly obtained information and trade on it. Instead of competing on a level playing field with other investors, he noted, the hedge fund managers sought to illegally trade today on what others would not learn until tomorrow. They were looking for detailed, company-specific information about earnings, sales, top-line revenue, product orders and other similar material information.

Full post as published by Jim Hamilton's World of Securities Regulation on February 14, 2011 (boomark / email).