The biggest (current) scandal/controversy on Wall Street revolves around accusations of insider trading facilitated by expert networks. The biggest expert network is Gerson Lehrman, founded by Mark Gerson ’94. (Previous discussion here and here.)

Gerson Lehrman may be in trouble.

SEC Probes Suspect Relationships of Expert Network Kingpin Gerson Lehrman

Readers may recall that I’ve been a long-standing critic of Gerson Lehrman, a “research” firm that signs up so-called experts to provide information to clients, typically hedge funds.

The problem with the Gerson model is the experts are often full time employees, and hence are effectively re-selling information they learned on their employer’s nickel. I’ve not seen Gerson’s consulting agreements, but I would strongly suspect that they are designed to shift liability for compliance with corporate policy to the consultant. And unless Gerson independently contacts the HR or legal department, there is no assurance that the employee is operating within official policy. One former head of research for a major bank expressed serious doubts about Gerson’s business model; he was pretty certain many Gerson consultants either had not obtained approval or had not done so properly (ie, a casual chat with the boss, “Do you mind if I spend a few hours a month on my own time working with some investors?”)

The SEC and the New York attorney general did probe Gerson in 2006 but it did not lead to charges being filed. But now the SEC is taking a broader view of what constitutes inside information, and Gerson may fall afoul of this reading.

As I noted in 2005, I think that most criticisms of Gerson Lehrman are baseless. But that does not mean that the US Attorney isn’t looking for another scalp . . .

UPDATE: Apologies for the confusion! There are two different legal entities of interest here: Gerson Lehrman the firm and Mark Gerson ’94, one of the founders of the firm. There is no evidence that Mark Gerson, personally, is being investigated by the SEC. But, as the Wall Street Journal reports, Gerson Lehrman may be in trouble.

The nation’s largest “expert-network firm” could be drawn into the government’s insider-trading investigation.

Federal Bureau of Investigation agents questioned a consultant for Gerson Lehrman Group in August as part of the probe, according to people familiar with the matter. The consultant, an employee of Marvell Technology Group Ltd., provided information about the technology industry to a Gerson client, Diamondback Capital Management LLC, a hedge fund the FBI raided last week, the people said.

I have no information about Mark Gerson’s current relationship with Gerson Lehrman. Indeed, for all I know, he may have sold his stake years ago. But, to the extent that he is still actively involved in managing the firm he founded, you can be certain that the US attorney is interested in him. I have updated the post by replacing “Gerson” with “Gerson Lehrman.” Thanks for the suggestion!

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