Investment expert witness advises on firm’s alleged insider trading

ByKristin Casler

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Updated onOctober 27, 2017

Investment expert witness advises on firm’s alleged insider trading

An investment expert witness advises on a case involving a capital market investment firm who allegedly acted on inside information. The Securities and Exchange Commission (SEC) alleges that prior to an announcement of a merger agreement between two companies, one defendant directed the purchase of 287,500 shares of one of the companies, based on a tip that he had received from one of the research analysts he employed at his hedge fund management company. The SEC alleges that employee, located in North Dakota, who is also a defendant, tipped his boss after receiving a tip from a loan underwriter.

The defendants deny the allegations. They claim their owner and hedge fund company closely followed the merging company for more than 10 years. They say that the decision to purchase more shares was based on his knowledge of the company and the fundamental research conducted by his firm, and was not based on any tip.

Question(s) For Expert Witness

1. What is involved in following a small-cap company such as the one at issue in this case?

2. Did the defendants’ research materials substantiate their defense?

Expert Witness Response

inline imageIt is my opinion that there is a reasonable basis to conclude that the hedge fund company defendant conducted exhaustive research into the merging company over an extended period of time. The research of the company is consistent with its approach as a small-cap value investor. That research process led the hedge fund company to conclude that the merging company had attractive long-term prospects and was considerably undervalued at the time of each of the defendants’ investments.

inline imageThe hedge fund company’s research on the merging company contains almost 200 individual items amounting to approximately 1,000 pages compiled over a 14-year period. It consists of brokerage reports, press releases, company presentations to investors, various company filings, internal memos, handwritten notes from selected conversations, and a variety of other documents. The merging company’s CEO testified that he had spoken with the hedge fund owner 20 or more times.

inline imageIn my experience this volume of research reflects exhaustive coverage for the size of the merging company. The quantity of research reflects the hedge fund’s mindset of a long-term oriented investor, willing to buy out-of-favor and potentially under-valued stocks and hold them over time so as to reap above-average gains for the investors in the funds. The CEO testified that the defendant was focused on the strategy of the company and where it was going. Further, the hedge fund owner was a big supporter of the merging company and had faith in it and its management. The hedge fund bought stock on many occasions throughout the CEO’s tenure.

inline imageIn contrast to the long-term oriented investor who bases investment decisions on fundamentals, a trader would look for a quick hit without doing extensive research, disregard capital gains preferential tax rates, and move on to the next case. He might base his decision on a news item, a technical pattern on a chart, earnings surprise, brokerage recommendation, or some other market perception. This was not typical of the hedge fund’s investment style.

inline imageThe expert is the president of an investment advisor and litigation consulting firm with more than 30 years in the investment management industry with major banks, trust companies, investment advisors, and a broker dealer.

About the author

Kristin Casler

Kristin Casler

Kristin Casler is a seasoned legal writer and journalist with an extensive background in litigation news coverage. For 17 years, she served as the editor for LexisNexis Mealey’s litigation news monitor, a role that positioned her at the forefront of reporting on pivotal legal developments. Her expertise includes covering cases related to the Supreme Court's expert admissibility ruling in Daubert v. Merrell Dow Pharmaceuticals Inc., a critical area in both civil and criminal litigation concerning the challenges of 'junk science' testimony.

Kristin's work primarily involves reporting on a diverse range of legal subjects, with particular emphasis on cases in asbestos litigation, insurance, personal injury, antitrust, mortgage lending, and testimony issues in conviction cases. Her contributions as a journalist have been instrumental in providing in-depth, informed analysis on the evolving landscape of these complex legal areas. Her ability to dissect and communicate intricate legal proceedings and rulings makes her a valuable resource in the legal journalism field.

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