Nathaniel Burney (Burney Law Firm) argues that the grey areas in the jurisprudence of insider trading leave the area wide open for due process violations when alleged crimes are being investigated and tried.

“On Feb. 3, an SEC press release about yet another expert network case said that “it’s legal to obtain expert advice and analysis through expert networking arrangement.”  So far so good.  But right before that, it said this case was part of “the SEC’s ongoing investigation into the activities of expert networks that purport to provide professional investment research to their clients.”  (Emphasis added.)  That’s a loaded sentence, and reveals a predisposition to think that expert networks are bad.  All this does is increase the fear that the feds are going to see insider trading where none occurred.

Similarly, in a Feb. 8 press conference for the latest roundup of insider trading charges, the SDNY U.S. Attorney Preet Bharara made a prepared statement that expert networks are not “inherently wrong or bad.”  It’s just that these particular defendants had a business practice that was inherently wrong.  But he opted not to discuss what is wrong or right about a situation where an expert network uses an employee of company X, even with company X’s permission.  He acknowledged that it’s still a “gray area.”

So Robert Khuzami spoke up.  Khuzami, the head of enforcement for the SEC, sent a warning that hedge funds dealing with expert networks had better do some serious due diligence, to find out whether the expert network uses employees of company X.  And if so, to make sure no material nonpublic information gets received.

In other words, there’s an affirmative burden to make sure the information you receive is not private.  Which is bizarre when there is no way to know that, in many cases, unless you’re privy to inside information. It’s a Catch-22.

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So there’s a huge “gray area” as to whether expert networks are kosher or criminal, as they currently exist and have existed for the past decade or so.  In theory, they’re lawful, but in practice the government sees them as only “purportedly” lawful.  And if you happen to use them, and you get inside information — info you couldn’t have known was secret if you weren’t an insider — too bad, so sad.  You had a duty to know the unknowable.  Maybe.

There are far too many unknowables here.

Isn’t this a classic due process violation? For the government to be allowed to use its might to deprive individuals of their liberty, property and livelihood, the public had better damn well be on notice that the conduct is something that’s going to get punished. If the public could not have known that certain conduct was unlawful, the government cannot be allowed to punish it.

And if the government itself doesn’t know where to draw the line…?”