Linking expert mouths with eager ears

THE inside information she gave him was “absolutely perfect”, a former hedge-fund executive testified on June 6th. Winifred Jiau, a consultant for Primary Global Research, an “expert network” firm, is on trial for peddling confidential information about companies to traders.

Ms Jiau's industry is also undergoing its own trial, of sorts. Expert networks are matchmakers that link clients with experts. A hedge fund that trades pharmaceutical stocks, for example, might use an expert network to find a doctor who can explain how a new cancer drug works. The network would set up a phone call and pay the doctor handsomely.

Such networks have recently caught the eye of American regulators, who fret that investors may be using them to ferret out illegal inside information. Since November more than a dozen people with links to expert networks have been arrested for insider trading.

The hullabaloo has spooked the industry. Some firms, such as Primary Global, may not survive. Others, such as Gerson Lehrman Group (GLG), which has not been accused of any wrongdoing, are looking for a way to distinguish themselves from tarnished rivals and win back business from jittery clients.

GLG is by far the largest network. In 2008 it generated two-thirds of the industry's global sales of $433m, according to Integrity Research Associates, a consultancy. As clients switch from smaller networks to ones with stricter safeguards, GLG could grab an even bigger share of the pie.

But the business will be less lucrative than before. GLG's clients spend on average $170,000 a year to subscribe to its database of 300,000 experts. This yields rich profits. But some hedge funds are suspending their use of such networks, for fear of falling foul of the law. Others are making their traders jump through legal hoops before allowing them to speak to an expert. A few are abandoning networks altogether, and finding their own experts. “It would be odd to think that doing research on your own or finding someone online and sending them a cheque is better than the framework we provide,” grumbles Alexander Saint-Amand, GLG's boss.

GLG has invested in technology to help clients search its database of experts. Compliance chiefs can set filters and block some experts if they worry there may be a conflict of interest. GLG keeps a record of who talks to whom, about what, down to the minute, which they could easily hand over to prosecutors if asked. “If you want to sell inside information, this is a terrible place to do it,” says Mr Saint-Amand.

But there is still scope for things to go awry. Professionals can sign up for GLG without a background check. They have to sign an agreement not to share any material, non-public information, but GLG does not listen in to the calls to enforce this. Clients who are determined to do wrong probably can. For example, they can meet experts through a network and then set up a separate “consulting” relationship, which enables them to buy tips without GLG ever knowing.

Among the millions of interactions that GLG sets up, “there are probably a couple of bad apples,” admits one former GLG executive. “But how many people have gotten raped and killed after using Craigslist?” he asks, referring to a popular website for people seeking romance or a second-hand lawnmower. “You can't go blaming Craigslist for that,” he fumes. But people do.

GLG faces other challenges, too. Expert networks became popular a decade ago, when people could not find obscure information on their own (and equity research from banks was considered hopelessly biased). Now, the internet allows anyone to find more or less any research. LinkedIn, a social-networking site for professionals, allows users to find specialists easily. And Quora, a website where people discuss serious topics, helps people find answers to questions without having to hire anyone by the hour.

GLG is trying to adapt. It recently launched G+, a social network and discussion forum, which aims to raise the profile of its experts and attract new business by prompting discussion on various subjects. But right now G+ reads like a professional version of Twitter, where people chirp their views on cloud computing, plastic packaging, medical devices and so on.

GLG's investors, which include Silver Lake, a big private-equity firm, want an exit soon, and are probably looking lustfully at the fortune LinkedIn's initial public offering recently generated. But going public may be hard unless GLG can rebrand itself.

New markets may bring greater rewards. In Asia the demand for expert networks is growing fast. Chinese traders want experts to explain American companies to them. At the same time, local expert networks are also springing up. These are typically cheaper, and probably less strict about policing insider gossip. That could give them an edge.

GLG wants to sell its services to a wider range of clients. Currently 40% of its sales come from hedge funds, but the company wants to woo all kinds of firms, particularly in high-tech fields such as the life sciences. Such firms have big budgets and a hunger for expertise. Wyatt Nordstrom, who runs Maven Research, another expert network, thinks that in the future most expert-network firms will shift towards “micro-consulting” (doing small-scale consulting projects). Others predict that expert networks may even compete with the big management-consulting firms.

These two industries already have more in common than meets the eye. Management consulting, too, has recently come under fire, after the ex-boss of McKinsey, Rajat Gupta, was charged with tipping off a hedge-fund manager. Experts seem to need more expertise in discretion.