John Kinnucan’s questioning by the FBI in a broad insider-trading investigation has put the spotlight on money managers and their use of a burgeoning breed of firms selling research and access to industry experts. Kinnucan runs Broadband Research LLC from his home in Portland, Oregon, digging up data on technology companies for hedge funds and mutual funds looking for an edge in the stock market. Several firms he identified as clients, including SAC Capital Advisors LP, Wellington Management Co. and Janus Capital Group Inc., have been asked for documents as part of the federal probe in which three hedge funds were raided on Nov. 22. “My contacts are the foot soldiers and the worker bees of the industry,” Kinnucan, who was interviewed by agents of the Federal Bureau of Investigation last month, said in an interview yesterday. Kinnucan, 53, is a small competitor in an industry led by companies like New York-based Gerson Lehrman Group Inc. and Guidepoint Global LLC, which link investors with research and experts in a range of sectors, countries and thousands of individual companies. The detailed information they provide on product development, sales and company strategy complement, and sometimes supplant, conventional research provided by Wall Street firms. Richard Bove, an analyst at Rochdale Securities LLC in Lutz, Florida, said he’s concerned that the investigation by the U.S. Attorney in New York and the U.S. Securities and Exchange Commission may result in criminalizing legitimate research that gives one investor an advantage over another. Crossing the Line “I have an obligation to find out everything I can to protect my clients that invest in a stock,” Bove said. “When am I crossing the line? If I get information that no one else has, am I therefore not supposed to act on it?” Insider trading involves the buying or selling of stock using material, nonpublic information. Expert networks can include former employees of companies being examined, professors and doctors, Geoff Bobroff, an independent fund consultant in East Greenwich, Rhode Island, said in a telephone interview. Bobroff is part of Gerson Lehrman’s network. Bobroff said the use of experts has risen in conjunction with the decline of traditional Wall Street research. Because of mergers, investment banks such as Goldman Sachs Group Inc. and Morgan Stanley now account for far fewer equity analysts than they did 10 or 15 years ago, he said. 2003 Settlement Wall Street was also placed under greater regulatory restrictions after 10 firms collectively paid $1.4 billion in 2003 to settle claims they slanted their research to win banking business. “This clearly was an outgrowth of the Wall Street settlement on proprietary research,” Bobroff said. Kinnucan, who has not been accused of wrongdoing, said there is nothing inappropriate about his research. Justin Dini, a spokesman for Gerson Lehrman, and James Fingeroth, a spokesman for Guidepoint Global in New York, declined to comment. Bloomberg LP, the parent company of Bloomberg News, has a marketing relationship with Gerson Lehrman. The number of expert networks in the U.S. has grown to about 40 this year from about eight in 2001, Michael Mayhew, chairman of Integrity Research Associates in New York, said in an interview. Expert networks took in about $450 million to $500 million in combined revenue in the past year, according to estimates from Mayhew, whose firm has published reports on the industry. 250,000 Experts Gerson Lehrman, based in New York, operates the largest network and has 60 percent of the market, he said. Its database has more than 250,000 experts worldwide, according to the company’s website. The most expensive expert networks charge their clients an annual fee as high as $120,000 for each industry group. Others collect hourly fees that can reach $1,000 for consultations with experts, according to Mayhew. Burton Greenwald, an independent fund-industry consultant in Philadelphia, is part of three networks including Gerson Lehrman’s, usually providing hedge-fund managers with information and his analysis on listed investment-management companies, he said. “I’ve found the networks make an honest and vigorous effort to make sure nonpublic information is not disclosed to the clients who use their services,” he said. “I have to sign an agreement with Gerson that I won’t talk about anyone who is my employer or about nonpublic information.” ‘Wild West’ Greenwald said the phone calls arranged by the networks aren’t monitored by the firms that set them up and, theoretically, could be abused by investors seeking insider information. “The top tier hedge funds may not do this, but I think when you get down to lesser players, you’re in the Wild West,” he said. The FBI recently questioned an account manager at Primary Global Research LLC, a Mountain View, California-based expert- network firm, the Wall Street Journal reported yesterday on its website, citing people familiar with the matter. FBI agent B.J. Kang, who was involved in last year’s Galleon Group insider- trading case, asked most of the questions, the newspaper said. The company hasn’t been named as the target of an investigation and isn’t accused of wrongdoing, Dan Charnas, a Primary Global spokesman, said in an e-mailed statement to Bloomberg News. “Should we be asked, we intend to cooperate fully with the authorities,” he said. SAC Capital, the $12 billion hedge fund run by Steven A. Cohen, and Wellington Management, the Boston-based money manager that oversees $598 billion, received requests for information from investigators, people familiar with the matter, who asked not to be identified because the firms are private, said yesterday. Jonathan Gasthalter, a spokesman for Stamford, Connecticut-based SAC, and Sara Lou Sherman, a Wellington spokeswoman, declined to comment. FBI Raids Janus said yesterday in an e-mailed statement that it got a request for general information and will cooperate with the inquiry. The Denver-based firm didn’t identify which agency made the inquiry. None of the research firms or money managers has been accused of wrongdoing. FBI agents two days ago searched the offices of Level Global Investors LP and Diamondback Capital Management LLC. Both hedge funds were founded by former employees of SAC. A third hedge fund, Boston-based Loch Capital Management, was also searched by agents, according to a person familiar with that matter. Kinnucan, who registered Broadband in 1994, said competition among expert networks is fierce these days as research firms like his are proliferating. “There is a new one every day,” he said. To contact the reporters on this story: Christopher Condon in Boston at ccondon4@bloomberg.net; Anthony Effinger in Portland, Oregon, at aeffinger@bloomberg.net; Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net. To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net.

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