When Hedge Fund Research Corrupts

January 31, 2011

The current investigation into insider trading by so-called expert network firms who provide hedge fund research has revealed just how tempting it is for mid-level managers at targeted companies to cross the line.

According to a story from Reuters, mid-level executives who sometimes make fairly modest salaries from their tech company jobs can earn anywhere from $200 to $1,000 per hour just by meeting with an expert network firm and the traders they work for.

Some of these so-called “consultants” who moonlight for the expert networks raked in as much as $200,000 in extra income a year, according to the investigation.

“In a situation where somebody is making $200,000, that’s clearly more than a little bit of outside work,” said Jeff Morgan, president and chief executive of the National Investor Relations Institute in Washington, who is quoted in the article. “Your average person may get enticed or sucked into this.”

One consultant nabbed in the insider-trading probe, Tony Longoria, was a supply chain manager for Advanced Micro Devices, Inc., in Texas. The federal probe alleges he earned more than $200,000 in consulting fees from Primary Global, a leading expert network firm, to pass along company information to the firm. While his exact salary from AMD is not known, the average salary for a supply chain manager at a U.S. company is roughly $95,000.

Thus the temptation to pad one’s income is very hard to resist. Some of it may stem from “income envy”. Mid-level employees and techies watch as others inside the tech sector earn millions on stock options, while they toil away for average wages. Still others may seek the ego boost of being considered important and plugged into key information.

Many companies have policies that prohibit employees from secondary employment of any kind for personal gain. However, the federal investigation is revealing that many companies either do not enforce these policies or are simply unaware of what their employees are doing. Or how much they are earning on the side.

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