Expert Networks Test IR

‘I can’t believe that any company executive in their right mind would actually speak to you guys,’ I recall saying to a compliance lawyer in an expert network company. Clearly, I was wrong. A few weeks later the news hit: the biggest ever insider trading investigation was upon us. What had started with the arrest in the fall of 2009 of Raj Rajaratnam, founder of the now defunct $3 bn Galleon hedge fund, had widened to the arrest of 46 people, with over 25 of those already having pleaded guilty. These people included bankers, company insiders, money managers and employees of expert networks.

Expert networks work like this: they seek out company insiders and those that are knowledgeable of the industry, and pay them hundreds of dollars an hour to provide ‘expert insight’ to members of the financial community. Although some companies that sell expert network services have high levels of integrity and very strong compliance, my view has always been this: no good can come out of a company insider being paid to speak to a member of the investment community. At the very least, the perception of it is terrible. At worst, material non-public information can be disclosed. And apparently, if the allegations are true, this is what has happened.

I first became aware of expert networks in the mid-2000s. One of the salesmen in the company I worked for at the time sent me an email. He wanted to let me know that he had been approached by a firm that was willing to pay him to provide expert insight. He wasn’t looking for guidance – he knew he should stay away – but he wanted to let me know what had happened. We had tight investor relations controls and employees had been trained to know that no one except a designated spokesperson was allowed to speak to the Street. In fact, it was considered a firing offence.

From time to time I would hear of them again. Company insiders had been approached and were either letting me know they had been contacted, or were seeking guidance on how to deal with the request. It was a testament to management’s support of IR and the integration of IR into the organisation that we were able to do our best to ensure that the company and its employees were always on side. Not only is it crucial from a legal and regulatory perspective, it is also critical for credibility and reputation management.

My view is that investor relations officers play both offence and defence. The offence is making sure the company’s story is well understood by the investment community so that they can make a well informed decision on what they believe your company’s stock is worth. The defence is to ensure that both the company and its employees are protected from any possible disclosure issues, as well as ensuring that the dissemination of information always happens in the appropriate manner. To make sure information is disclosed correctly, there should be guidelines in place covering what can (and can’t) be released and under what circumstances.

While the whole investigation and all of the media reports about the widening SEC probe appear to be a somewhat sordid soap opera, the fallout and implications for our profession are very real. I will continue to watch this unfold with a bit of morbid fascination, but I will also be looking to see how the regulatory authorities will respond. In the meantime, all of us in investor relations can see this as a cautionary tale and educate management on the importance of internal IR controls.

Janet Craig is an experienced investor relations officer, having spent the last 15 years working in publicly traded companies, including heading up investor relations at Nortel Networks and ATI Technologies.

A note from the author: I admit, I am a bit of a social media-phobe. I don’t get Facebook – it really freaks me out. And I really, really don’t get Twitter – probably because I can’t manage to do anything in that few characters. Nonetheless, I was extremely complimented when Inside Investor Relations asked me to start blogging. Then I got scared. I realised I was going to need to be topical, interesting and sound reasonably intelligent! Hopefully, with input from my peers, my posts can become a great venue to comment on trends, news and views in investor relations. I expect to post on a regular basis, and will look to comment on issues from an investor relations officers’ point of view.

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