Expert networks give investors an edge

But regulators say some have stepped over the line

Galleon Group cofounder Raj Rajaratnam was convicted of insider trading.
Associated Press/File 2011
Galleon Group cofounder Raj Rajaratnam was convicted of insider trading.

E ven on a Saturday, the conferences that Dr. Leslie Fang attended in New York for MedaCorp, a Boston firm that provides investors with industry insight from medical professionals, were packed.

A renowned kidney specialist and physician at Massachusetts General Hospital, Fang with other prominent physicians would dish on the latest treatments and research - information fund managers in the audience hoped would provide an edge when investing in health care. Still consulting intermittently for MedaCorp, Fang is amazed at the people who interrupted weekends for the briefings.

“When was the last time they would give up a Saturday for anything?’’ Fang said. “They definitely view it as valuable information, valuable enough for them to give up a Saturday.’’


Fang is a member of an expert network, a collection of specialists that serves as a kind of research institute for investors willing to pay hefty subscription fees. For years, these networks operated - legally - in the shadows of the financial industry, but in recent months they have been thrust into an unwelcome spotlight by a series of insider trading scandals.

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The problems for the industry arose when some consultants - and their investor clients - crossed a bright legal line by disclosing confidential information about a company’s business, and trading on that for profit. The insider trading scandal involving New York hedge fund Galleon Group is the most prominent example: Among the dozens of convictions and guilty pleas in the case, 10 people had connections to an expert network firm, whether as a consultant, employee, or client.

In November, in a separate case, a French doctor pleaded guilty in US court to leaking information to a hedge fund manager about a drug trial in which he was involved. The hedge fund trader also pleaded guilty to related charges.

In Massachusetts, Secretary of State William F. Galvin last year accused a hedge fund manager of insider trading for allegedly using confidential information he received from doctors working for the expert network Guidepoint Global LLC of New York. Galvin alleged three doctors involved in the clinical trial of a cancer drug provided inside information to the hedge fund manager while they were consultants for Guidepoint.

Guidepoint declined to comment.


No one from MedaCorp has been implicated in an insider trading case. But the firm’s parent, Boston investment bank Leerink Swann, is under investigation involving trades in the stock of one of its clients by one of its MedaCorp customers, the giant New York hedge fund SAC Capital.

The Securities and Exchange Commission is investigating whether the hedge fund in 2009 received inside information about the $1 billion takeover of Leerink client Cougar Biotechnology Inc. by medical giant Johnson & Johnson before it was announced, according to a person with knowledge of the investigation, who asked not to be identified because of the sensitivity of the matter.

Leerink was hired by Cougar on May 20, 2009, to provide an opinion on whether the J&J offer was fair to shareholders. That same day an unusually high number of Cougar shares traded hands. After the J&J deal was announced one day later, Cougar’s stock exploded, making a lot of money for investors who bought shares before the announcement.

Leerink declined to comment on the Cougar case. But in a statement, the company noted that as an investment bank it is highly regulated and bound by rules and practices that it extends to its MedaCorp subsidiary.

“Fairness, objectivity, and compliance is of paramount importance to us and the firm is and has always been committed to adhering to the highest ethical standards and best industry practices in all of our lines of business, including MedaCorp network,’’ Leerink said.


In a statement, SAC Capital reiterated it had not been contacted by authorities about Cougar, but would cooperate if it was. The firm added that “SAC’s investment in Cougar Biotech was perfectly reasonable and based on strong fundamental research and widely available public information.’’

Leerink launched MedaCorp 15 years ago as an outgrowth of its business providing research and banking services in the health care arena. Unlike the common Wall Street practice of research analysts reporting on developments, MedaCorp provides its investor and entrepreneur clients with opinions about drug potentials and business opportunities directly from experts. MedaCorp’s network of thousands of doctors includes heads of medical departments, research labs, and others who have established themselves as leading figures in their fields.

Leerink would not comment on MedaCorp. But those familiar with expert networks say clients pay fees that can run into the tens or hundreds of thousands of dollars for a firm’s services. In the medical world, that buys one-on-one consults with a physician who can untangle the dense conclusions of a research project and conference calls where a group of consultants comment on newly released research that identifies promising developments in one corner of medicine or another.

Doctors typically are paid a fixed fee for their time, $350 to $500 an hour, sometimes more. Since medical research is often rendered in terminology unfamiliar to nonmedical people, expert consultants often serve as translators - explaining the upshot of a drug trial, possibly adding personal views about the validity of results, and helping investors separate fact from hype.

They find the work easy and fun, doctors said, and it’s flattering and stimulating to be asked about their areas of expertise. More important, they said, consulting provides an opportunity to influence investment in medical research.

“The biggest funder of medical research is private industry,’’ said Dr. Stephen Rennard, a pulmonologist at the University of Nebraska Medical Center who has worked for MedaCorp and other firms. “It’s important to keep investors engaged in the process - and engaged in the process in an informed way. And this is one of the few ways I can have some influence’’ on them.

Several physicians who worked for MedaCorp and other firms said they found them conscientious about educating consultants about the rules governing confidential information. The firms’ employment contracts forbid the consultants from disclosing nonpublic information about a company.

At MedaCorp, these prohibitions and conditions of confidentiality are the first items on its employment form. Fang, the kidney specialist, said MedaCorp executives would not use any consultant they thought had loose lips and wanted to show off by talking about sensitive information.

“You never know what people are going to wind up saying when they want to impress,’’ Fang said.

The recent insider trading cases have been hard on the field; some investors have reportedly stopped using expert networks, while others have imposed tighter restrictions on their use. Concern about the future of the industry reached such a fever pitch that at several points last year US regulators took the unusual step of reassuring investors and consultants alike that the business itself was not under attack; that so long as confidential information is not shared, expert networks perform a legitimate and valuable research service.

Leerink provides investment banking services to a range of biotech and medical companies, including hosting conferences that feature its banking clients alongside MedaCorp specialists. The combination makes the firm a powerful center of information on Wall Street for the biomedical world, and companies often see their share prices rise after Leerink or MedaCorp make approving remarks, or sink on a negative assessment.

Dr. Corey Goodman was on vacation in Hawaii in spring 2005 when he was deluged with calls from panicky investors in his small firm, Renovis, which had just reported promising results of the clinical trial of a stroke drug under development. On May 31, 2005, Leerink had hosted a conference call in which one of its MedaCorp consultants, Dr. Marc Fisher of UMass Memorial Medical Center, questioned whether the results were as promising as Renovis asserted.

After the call, Renovis’s stock got hammered, losing nearly 23 percent on May 31 alone.

Goodman said he contacted Fisher and urged him to learn more about the study methods. Fisher, in a recent interview, acknowledged he was not well informed about the Renovis study when he first questioned its results. “I really stepped in it,’’ Fisher said.

Fisher, who no longer does expert consulting because he edits a medical journal, said he blames Leerink in part for the incident, contending the firm did not prepare him sufficiently for the conference call. (MedaCorp’s website says consultants such as Fisher are given materials to prepare them to talk directly to investors.) He later retracted his initial opinion of the Renovis drug after talking to the trial’s principal investigator. But his subsequent remarks on the study - to an industry journal - did not receive nearly the attention on Wall Street as those made during the Leerink call.

Ultimately, Goodman’s beef with Leerink didn’t matter. In a subsequent trial, the stroke drug proved ineffective and AstraZeneca, which had licensed the drug from Renovis, elected to drop it. Renovis, which was sold to a German firm, closed in 2008.

Andrew Caffrey can be reached at