11/27/2012 09:46 pm ET

Doctors Who Advise Wall Street Investors Operate In Ethical Grey Zone

Once upon a time on Wall Street, the enterprising trader looking for a nugget of inside information about a public company worked the phones, developed sources at law firms and pestered friends and family for tips.

According to allegations made in a recent $276 million insider trading fraud lawsuit -- and several other high-profile cases in recent years -- the aspiring fraudster now has an easier path: hire an "expert network" company to find those sources.

Expert network companies have been around for about a decade. They sign up thousands of academics and industry professionals as consultants, then offer their services to money managers, investors or anyone else willing to pay top dollar for an hour or two of that person's time. Consultants, and the industry, describe what they do as matchmaking, pairing subject-matter experts with analysts and others who make investing decisions.

Federal authorities have said the relationships can be conduits to fraud, giving hedge funds and other money managers easy access to people with market-moving information about a drug or another product.

The increased scrutiny of these relationships has led a handful of financial firms to sever ties with the expert companies. Now, some medical ethicists are urging their peers to do the same, warning that the risks might outweigh the financial reward.

"There's one reason for these investment firms to get involved, and that is to get the inside dope on a product," said Arthur Caplan, director of the Center for Bioethics at New York University.

He said physicians should steer clear. "This work has nothing to do with being a doctor," he said.

In separate interviews with The Huffington Post, three doctors said that they followed ethical practices during consultations for fees that averaged about $400 an hour. They said they supplied general information and opinions only on subjects in the public domain and that the conversations helped them better understand how market forces shape their profession.

"There's too much at risk," said John Hsu, director of anesthesiology at Presbyterian Intercommunity Hospital in Whittier, Calif., who consults through Gerson Lehrman. "If I am convicted of insider trading, that means jail. I would lose my license and lose my reputation. It's not worth it."

The doctors -- two of which asked to remain anonymous for fear hurting their consulting business -- didn't agree among themselves about what counts as fair game to disclose to a money manager or other questioner. For example, one oncologist said he would divulge whether a particular drug was effective -- and would be willing to reveal, for example, how many patients out of 10 it had helped.

Hsu, on the other hand, said he would only reveal his general impressions of the effectiveness of a drug, and would not be willing to say how many people it had helped.

Hsu said he had been asked this kind of question, and others that probed at what he might know about a drug under development, but had never revealed that kind of information. "I don't want to screw up," he said. "I'm always watching what I say."

Federal authorities allege that some of these relationships have far exceeded the legal bounds. In the most recent case, federal prosecutors and the Securities and Exchange Commission claim that Mathew Martoma, a former portfolio manager at an affiliate of the powerful hedge fund SAC Capital Advisors, traded on insider information given to him by University of Michigan neurology professor Sid Gilman.

Gilman, according to the allegations, served on a committee monitoring the safety of an Alzheimer's drug under development by drug companies Elan and Wyeth. In 2008, according to the criminal complaint, Gilman told authorities that he passed along information about the trial, which prompted SAC Capital to sell out its large positions in the companies within days.

Gilman received $108,000 in consulting fees through an expert network company -- later identified in press reports as Gerson Lehrman Group -- but did not otherwise profit from the information he passed along, according to the allegations. The hedge fund, run by the fantastically wealthy Stephen Cohen, did quite a bit better: earning $276 million, counting profit from short positions taken in the stocks soon after the fund sold them off, the government claims.

The fraud unfolded "on a scale that has no historical precedent," Manhattan U.S. Attorney Preet Bharara said at a news conference.

Gerson Lehrman did not respond to a request for comment and has not been accused of wrongdoing. In the past, the company has said it requires its consultants to sign nondisclosure agreements and not to discuss their own companies. Professionals who have accepted consulting jobs through Gerson have said they must take a yearly ethics review quiz and sign off before each new assignment asserting that they do not have a conflict that would prevent them from discussing the topic.

Stories about illicit activity enabled by expert network companies date at least as far back as 2005, when the Seattle Times identified 26 instances in which doctors leaked confidential details about ongoing drug research to Wall Street firms.

The expert network company that has received the most attention in recent years is Primary Global Research, which turned up in the insider trading case involving Raj Rajaratnam, the former Galleon Group head who was convicted of securities fraud last year. Several Primary Global employees have since been convicted of insider trading-related charges.

In another high-profile case, Broadband Research founder John Kinnucan pleaded guilty in July to passing along illegal tips to hedge fund clients and obstructing justice. He had previously made waves when he sent out an email to those clients in which he said he refused to wear an FBI wire. More than a dozen insider trading arrests followed in an operation that Manhattan U.S. Attorney Preet Bharara and the FBI called "Perfect Hedge."

What worries Eric Campbell, the director of research at the Morgan Institute for Health Policy, part of Harvard Medical School, is how little academic institutions know about the relationships between their staff and these outside consultancies -- or the financial firms that pay big fees to hire them.

"There is no common disclosure standard," he said. "If you asked me how frequently these consultations take place, I couldn't tell you. There is no data. Nobody knows."

Campbell said this lack of oversight puts the institutions at risk. He noted that other relationships, such as those between pharmaceutical companies and doctors, are very closely scrutinized, even though those can be greatly beneficial, leading to the development of a powerful new drug, for example.

Even if above board, there is no obvious societal benefit to a relationship with a financial company," he said. "The outcome is financial gain for a very select group of people."