Material Non-Public Information More Common Than You Think

Material non-public information, sometimes known as MNPI has been back in the news lately. A perfect example of this would be the Gupta trial going on now in New York City. For those of you who dont remember, Gupta is accused of providing now-imprisoned hedge fund manager Raj Rajaratnam with boardroom secrets between March 2007 and January 2009 while he was a director of Goldman Sachs and Procter & Gamble Co, according to an article in the Huffington Post. Although the issue of insider trading has been coming up in the news more recently, it really never actually went away. Keefe, Bruyette & Woods, James McDermott was in the news in 2000 regarding this subject. Also, ImClone CEO Samuel Waksal was convicted of disclosing investment information in Martha Stewarts infamous case, and Jeffrey Skilling, former Enron president, was convicted in 2006 on 19 counts, insider trading being one of them. It is evident that trading on material nonpublic information is much more common than one may think. Material non-public information can result in several problems for both hedge funds their investors. The risks to a hedge fund if they are found to be trading on MNPI are great and can range from fines and censures to a complete shut-down of a firm. Fines are what happened in the Gupta trial. As of now, Gupta is being brought up on five counts of securities fraud and one count of conspiracy. Raj Rajaratnaam, who Gupta worked with to carry out this scheme, is currently serving 11 years in prison. Because of increased regulatory oversight of hedge funds, now, more than ever, it is important for investors to ensure that their operational due diligence encompasses a review of MNPI. A deep dive operational due diligence review can help bring to investors attention specific things to look for when evaluating a fund in regards to MNPI. For example, what is the hedge fund policy when it comes to insider trading? Also, how is the hedge fund able to ensure that their policy is followed? Operational due diligence consultants can look at things like internal training manuals and compliance oversight to evaluate how these potential problems would be dealt with. Many people dont realize the myriad of ways that a hedge fund may be exposed, either intentionally or accidentally, to insider trading types risks. Sometimes, an anonymous trading tip can be emailed or faxed to the fund or a hedge fund manager might be exposed to the information directly. During the operational due diligence process, it is important to keep this in mind when investors are performing due diligence on a fund because there are many different places to look for signs that the fund has the potential to trade on MNPI. Another example of where to look for these
2012 Corgentum Consulting, LLC

types of things would be through, expert networks and other third-party firms that provide the fund with information. By not incorporating a hedge funds approach to material non-public information during the operational due diligence process, an investor who allocates to a hedge fund whose employees are not appropriately trained to deal with these scenarios increases the risk of capital loss due to the potential legal regulatory consequences of trading on MNPI.

2012 Corgentum Consulting, LLC