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U.S. prosecutors go after SAC hedge fund for insider trading

Jeff Horwich Nov 21, 2012
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U.S. prosecutors have filed their biggest-ever case of insider trading.

The allegation: SAC Capital Advisors, a hedge fund, got early warning about the failure of an Alzheimer’s drug in clinical trials. That info let the fund sell its holdings in the companies behind the drug, and reap $276 million.

The inside information allegedly came from a doctor involved in the trial. Just how common is this kind of thing?

“Insider trading has been increasing in recent years, in part because of the aggressiveness of hedge funds seeking out opportunities,” sayd Robert Prentice, professor of business law and ethics at the McCombs School of Business at the University of Texas at Austin.

This kind of insider trader seems more unusual because of the ethical expectations we typically place on doctors. But even they are susceptible, thinks Prentice.

“One of the biggest problems with insider trading recently has been the rise of these ‘expert networks,'” he says, “where hedge funds who are looking for an edge hire expert networks to go find them experts.”

In theory, he says, there’s nothing wrong with the idea that an outside expert, familiar with the scientific process, would be able to make an educated guess whether the drug would work. The problem arises, though, when those experts give away material from the companies that they work for.

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