A number of individuals have been convicted of, or entered guilty pleas to insider trading in connection with their work for expert networks. Expert networks connect firms that seek a better understanding of particular business issues with experts in specialized areas. The experts may be employed by firms that give them access to material nonpublic information, and clients of expert network firms have used that information to make profitable trades. One tipster named Winnie (called the “Poohster” by traders for leading them to a pot honey) received Cheesecake Factory gift certificates and lobster shipments, in addition to hundreds of thousands of dollars.¬†Some have raised questions about whether cooperating witnesses have entrapped expert network consultants into disclosing inside information.

What lapses in corporate policies, if any, have enabled these relationships to flourish? Can corporations allow employees to consult for expert networks without creating too great a compliance risk? At what point does a trading firm’s use of experts reflect a bona fide piecing together of disparate information as opposed to a mosaic of material, nonpublic sources?

Update: SEC Reaffirms Expert Networks Okay (3/23/11)

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