The Massachusetts Securities Division has filed a complaint against a hedge fund manager claiming that it should not have relied on an expert network to ensure that its consultants did not transmit material nonpublic information.  Although the respondent's principal testified that he believed that the expert network firm screened the consultants and ensured compliance with their confidentiality agreements, the MSD argues that the respondent did not have an adequate basis for that belief or reliance and that the respondent had an independent duty to ensure that it did not receive inside information.  The MSD alleges that the respondent used material nonpublic information from clinical trial investigators to trade biotech stocks for its fund

OUR TAKE: We believe that this is one of the first cases where a regulator specifically describes how the use of an expert network firm subjects an investment manager to insider trading charges.  In this case, the MSD alleges that the hedge fund firm had no basis for relying on the expert network firm's due diligence.  We wonder whether the respondent would have a duty to further investigate had the expert network firm made representations about its due diligence and monitoring.