When one of its executives was arrested on 11/24, Primary Global Research immediately directed its employees and expert-network in Manila, the Philippines, to shut down operations until December 2.  Then, a vice president, James Fleishman, emailed some senior employees thanking them for their services, which no longer would be required.  Less than a month later, Fleishman was arrested on insider trading charges.  Now a frigid chill is sweeping the expert-network industry, and so-called "Wall Street matchmakers," who connect large investors with outside experts, are struggling to hold onto clients. 

"We’ve completely stopped using them, indefinitely, on the advice of our legal counsel," said an employee at a private equity firm.  Others are reviewing their policies pertaining to expert networks.  "It’s prudent to take a time out right now and reassess how expert networks are used," said an employee at another large money manager.

Credit Suisse reportedly will continue to use such companies for equity research, but it's taking steps to bar other departments from using the services. Citigroup is evaluating its pols and procedures. Regardless of where they are, the scandal has disrupted the entire industry.

These past couple of months, federal authorities have raided a number of hedge funds and arrested several consultants and employees tied to Primary Global.  Some say expert networks will have to ratchet up their compliance standards - or risk losing what's left of their business.  According to former SEC Chairman Harvey Pitt, "The smart thing would be, both for the people who provide these services and the people who purchase them, to have their own clearly defined rules." 

Professor Robert Weisberg of Stanford put it more bluntly, predicting little tolerance for lax controls:  "Boy, are you going to see ruthless self-regulation by the firms themselves, and they are going to fire people like crazy if they suspect any cheating at all."   And, given the high cost of adopting strict compliance measures, coupled with the fact that only a handful of expert-network firms have annual revenue in excess of $40 million, it's likely that most such firms will "close up shop." 

    Expert-Networking Leader.   Firms looking to adopt new rules are likely to follow the lead of the Gerson Lehrman Group, the industry’s largest player.  Its outside consultants, who must complete an interactive training program, are prohibited from speaking to the same client more than 3 times in 1 year. Once experts earn $2,500, they must secure written permission from their employers to continue working.  Gerson Lehrman also regularly contacts thousands of companies to get their policies on expert networks.  If a business has a ban, that company and all its subsidiaries are placed on a “do not call” list.  That list numbers 13,000, according to a person close to Gerson Lehrman.

It should be noted that Gerson Lehrman was the subject of an insider trading investigation in 2007 by the NYS attorney general.  In November, authorities reportedly questioned a Gerson Lehrman consultant employed by Marvell Technology.  The firm, which has never been accused of wrongdoing, declined to comment.  

In the end, no set of rules will police everybody - but they'll nevertheless try.   [NYT Dealbook, 12/27]