Seeking an Edge, Big Investors Turn to Network of Informants - WSJ.

com

http://online.wsj.com/article_print/SB116459881353833275.html

November 27, 2006

PAGE ONE

In the Know

DOW JONES REPRINTS

Seeking an Edge, Big Investors

Turn to Network of Informants

This copy is for your personal,

non-commercial use only. To order
presentation-ready copies for
distribution to your colleagues,
clients or customers, use the Order
Reprints tool at the bottom of any
article or visit:
www.djreprints.com.

Mark Gerson Assembles Web

Of Moonlighting Managers;
Applebee's Bars Practice

See a sample reprint in PDF

format.
Order a reprint of this article now .

Drawing a Line at 'Nonpublic'

By LAURIE P. COHEN
November 27, 2006

EMAIL PITCH
7

Marlin Kilgore's day job is purchasing parts for Penske Truck Leasing
Co. in Memphis, Tenn. His second job, which pays $100 an hour, is to
answer questions from hedge funds and other big investors about the
truck-parts makers he buys from.

Billionaire Investor Drives Overhaul of Auto-Parts

Giant1, 9/30/06
How Giant Bets on Natural Gas Sank Brash
Hedge-Fund Trader2, 9/19/06

See an example of a
Gerson Lehrman pitch
inviting someone to be an
expert.8

The investors interrogate the 36-year-old maintenance manager

about the pricing and availability of parts, about how long they
last, about how the warranties work and how often they are
used. What they are after is intelligence about publicly traded
parts makers such as Federal-Mogul Corp., ArvinMeritor Inc.
and Exide Technologies.

The Hedge-Fund King Is Getting Nervous 3,

9/16/06
In Twist for Private Buyouts, Some Shareholders
Fight Back4, 8/18/06

Mr. Kilgore's moonlighting job is the creation of Mark Gerson,

a New York networking wizard who has done for professional
Worry Amid Hedge Fund Boom: Privileged Access
to Information 5, 7/27/06
investors something akin to what Match.com has done for the
In Today's Buyouts, Payday for Firms Is Never Far
Away6, 7/25/06
nation's singles. He hooks up current and former middle
managers from hundreds of companies with professional
investors desperate for an investing edge. Mr. Gerson has assembled an army of 180,000
"consultants" from companies ranging from J.P. Morgan Chase & Co. to New York
Times Co., and he sells their time for top dollar.
Two things have made Mr. Gerson's network both successful and controversial: Some of
his consultants dish to investors without the knowledge of their bosses, sometimes in
violation of their employers' policies. And they are doing so at a time when federal
regulators have made executives at public companies gun-shy about talking shop privately
with big investors.

10/2/2007 6:47 PM

Mr. Gerson, although unknown to many investors, has emerged as an

important information broker to an increasingly powerful force in the
investment world -- hedge funds and private-equity firms with hundreds of
billions of dollars under management. These private investment firms,
which are loosely regulated, have turned to Mr. Gerson's fast-growing
1 of 8

Seeking an Edge, Big Investors Turn to Network of Informants - WSJ.com

http://online.wsj.com/article_print/SB116459881353833275.html

research firm, Gerson Lehrman Group, for information they hope will give
them an investing edge.
Gerson Lehrman says it instructs its consultants never to disclose material nonpublic
information or even to discuss their own companies. All of its consultants, it says, must
agree in writing to follow the rules of their primary employers. (Most of them, it adds, do
not even work for public companies, but are lawyers, accountants, professors and other
professionals.)
Interviews with dozens of Gerson Lehrman consultants and their employers, however,
reveal that the consultants are sometimes unaware of their own companies' restrictions and
sometimes have only a hazy understanding of what qualifies as nonpublic information.
Mr. Kilgore, for example, says he isn't violating any policies at Penske Truck Leasing. A
spokesman for the company, a joint venture of Penske Corp. and General Electric Co.,
says employees aren't permitted to use data "obtained in the course of employment for
personal advantage," and that the company had no idea one of its employees was
moonlighting for Mr. Gerson. (Mr. Kilgore wasn't identified to Penske Truck in an inquiry
about its moonlighting policy.)
Mr. Gerson, a 34-year-old graduate of Yale Law School, picked a fortuitous time to launch
his company, now the largest of several firms that match investors with experts in various
industries. For years, executives at many public companies had few qualms about
discussing business directly with big investors and with analysts working with their
investment bankers. But in 2000, in an effort to level the playing field for all investors, the
Securities and Exchange Commission instituted Regulation Fair Disclosure, or Reg FD,
which barred companies from selectively disclosing important nonpublic information.
Hedge funds were soaring in number, expanding the appetite for useful investment
information. At the same time, the Internet had democratized the information-gathering
process, putting SEC filings and other corporate disclosures a few keystrokes away for all
to see. For big investors, getting a leg up was suddenly much harder, and worth paying for.
"What's in the public domain is worthless in terms of making
money," says Chip Morris, a partner at Integral Capital Partners, a
private investment firm that occasionally uses Gerson Lehrman's
consultants. In the new regulatory environment, he says,
companies put out less information and qualify it more. It is hard,
he says, for an investor "to randomly call someone" at a company
and get them to talk about their industry.
The business has thrived. Since 1999, Mr. Gerson says, revenues
have grown by more than 30% a year, on average. Investors say
they are expected to approach $200 million in 2006 and that profit
margins exceed 25%. Clients now include Steven Cohen's influential hedge fund SAC
Capital Advisors, mutual-fund giant Fidelity Investments and many of Wall Street's big
10/2/2007 6:47 PM

2 of 8

Seeking an Edge, Big Investors Turn to Network of Informants - WSJ.com

http://online.wsj.com/article_print/SB116459881353833275.html

investment banks.
Mr. Gerson arranges his experts into eight sectors, including technology, health care and
real estate. He charges clients by sector. For $60,000, a client can make unlimited
telephone calls for six months to experts in one sector. The fanciest service costs $1
million for six months, which gives clients all eight sectors, plus bonuses such as
one-on-one meetings with experts.
Mr. Gerson, who has never married, seems unsuited to the business of matchmaking. His
friends describe him as socially awkward. "He's intensely serious," says Roger Hertog,
vice chairman of AllianceBernstein Corp., who has served with Mr. Gerson on the board
of the Manhattan Institute, a conservative think tank. Newark's Democratic mayor, Cory
Booker, became a fast friend of Mr. Gerson at Yale Law School. While praising Mr.
Gerson's philanthropic and professional accomplishments, he says: "He's a little peculiar,
but I relish his strangeness."
Mr. Gerson approaches the activity of meeting people and introducing them to one another
methodically and indefatigably. "Mark is the most successful networker I've ever met in
my life," says Ed Nicoll, the chief executive of broker Instinet and an early Gerson
investor.
"The Internet has changed connectedness," Mr. Gerson observes, enabling "people like me
to become connected at young ages."
Mr. Gerson grew up in Short Hills, N.J., attended Williams College, then deferred
admission to law school to teach at an inner-city Roman Catholic school in Newark.
Before getting his law degree in 1998, he spent a summer at McKinsey & Co.
While working on a pharmaceutical-marketing project for that management and consulting
giant, he says, he was struck that there was no easy way to locate an industry expert whose
brain he could pick. "There was no service to call," he says. After brainstorming with
Thomas Lehrman, a former analyst at Tiger Management, the two decided to try to fill that
void.
In 1998, they raised nearly $1 million from friends and family and hired experts to write
guides on industries such as health care, media and technology. They couldn't sell a single
one. Professional investors told Mr. Gerson they weren't interested in more reading. But
several investors said they'd love to talk to the authors of the guides. So in 1999, Mr.
Gerson recast the firm as an information broker, and began lining up experts.
Gerson Lehrman recruits consultants, which it calls "council members," at conferences and
trade shows and through referrals. It finds others through Internet searches of publications
and professional and career Web sites. Their pay averages $240 an hour.
In September, a legal reporter for The Wall Street Journal received an unsolicited email
from someone who identified herself as the manager of Gerson Lehrman's "law council."
10/2/2007 6:47 PM

3 of 8

Seeking an Edge, Big Investors Turn to Network of Informants - WSJ.com

http://online.wsj.com/article_print/SB116459881353833275.html

(See the email.9) The email carried the subject line "Invitation to Consult." She offered the
reporter the opportunity to join nearly 5,000 lawyers in Gerson Lehrman's law group,
which she said includes members of "every U.S. presidential cabinet since President
Nixon's." The benefits, the email said, included the opportunity to "Earn Consulting Fees."
(The Wall Street Journal has a policy prohibiting outside consulting work.)
Gerson Lehrman's recruiting from public companies has sparked debate about how close
its experts get to legal limits on sharing material nonpublic information. Gerson Lehrman
says just 12% of its consultants work for public companies. Others are ex-employees of
public companies.
Former SEC commissioner Harvey Goldschmid, who helped write Reg FD, says there's
nothing wrong with investors' digging around for information "from different sources that
may add up to something material" -- that is, which could affect a company's stock. What
could lead to problems, he says, is that payments to corporate employees "may create
temptations to go too close to a line in order to curry favor" with Gerson Lehrman clients.
In addition, those employees might not understand "what is material," he adds.
Mr. Gerson says both consultants and clients are constantly reminded that discussing
material nonpublic information isn't allowed. Two law firms -- Proskauer Rose and
Skadden, Arps, Slate, Meagher & Flom -- reviewed the firm's compliance procedures.
Gerson Lehrman officials maintain that few consultants are in any position to dole out
inside information. "Our council members are, for the most part, pretty junior people in the
industries they work in," says Jonathan Glick, Gerson Lehrman's research director. "The
likelihood they'd have proprietary information is extremely low."
Mr. Glick says Gerson Lehrman consultants contribute "mosaic" tidbits to clients -describing, for example, an emerging consumer trend in a certain region -- that aren't
useful alone, but when put together with other data, could constitute useful trading
information. Consultants who work for public companies, he says, discuss only their
industries, and "are never asked to comment on their company or employer."
Some critics are skeptical of such assurances. "Sophisticated investors are potentially
taking advantage of people who don't know they're going over the line" by disclosing
nonpublic data such as internal sales figures, asserts Jill Fisch, director of the Fordham
Center for Corporate, Securities and Financial Law. "Once someone is being paid, it's hard
for them to draw the line and say 'no.' "
Ted Siegel began consulting for Gerson Lehrman in 2004 when he was training to be a
district manager at Bed Bath & Beyond Inc. in New Hampshire. Most Gerson Lehrman
clients, he says, obeyed the rules, but two investment analysts were "extremely pushy in
terms of trying to get specific information" about his employer. He says he didn't respond
and told his Gerson Lehrman contact he wouldn't talk to the two again.
Mr. Siegel, who recently left the home-furnishings retail chain, says Gerson Lehrman
clients have sought him out in recent months because of his knowledge of Yankee Candle
10/2/2007 6:47 PM

4 of 8

Seeking an Edge, Big Investors Turn to Network of Informants - WSJ.com

http://online.wsj.com/article_print/SB116459881353833275.html

Inc., a Bed Bath supplier that last month agreed to be sold to a private-equity firm. A Bed
Bath & Beyond spokesman says the retailer bars outside employment that constitutes a
conflict of interest or that could result in disclosure of confidential corporate information.
He declined to comment on Mr. Siegel's situation.
Grant Ginder started consulting for Gerson Lehrman six months before he left his job as a
children's apparel buyer for Wal-Mart Stores Inc. He says "there are times when people
have asked" for inside information, "and I haven't answered." Since leaving Wal-Mart, he
says, he has worked his contacts to gather information about the company's earnings
trends. "Anyone's privy to it if they know the right people," he notes. He often shares his
opinions with analysts who are Gerson Lehrman clients. "I've been pretty accurate every
quarter," he says.
Eminence Capital, a roughly $2 billion hedge fund that has held shares in Wal-Mart, is one
client that has consulted him. Mr. Ginder says he spoke frequently to Eminence analyst
Scott Alberi about Wal-Mart's competitors and suppliers, such as Children's Place Retail
Stores Inc. and infant-clothing maker Carter's Inc. Mr. Alberi declines to comment.
A Wal-Mart spokesman says "employees cannot work for Wal-Mart and for another
company where a conflict of interest exists.... We can't restrict what someone does after
they leave our employment."
Gerson Lehrman says consultants who don't have their employers' written permission to
moonlight are restricted to three calls a year with each investing client. And when
companies ask Gerson Lehrman to back off on recruiting employees, it abides by such
requests, the company says.
Carol DiRaimo, head of investor relations at restaurant chain Applebee's International
Inc., says Gerson Lehrman offered one store manager more than $400 an hour to consult
and invited the chain's risk management director to set his own hourly rate. Ms. DiRaimo
says she thinks Gerson Lehrman was trying to get store sales figures before they are
publicly disclosed. "It is a way to circumvent Reg FD," she asserts. Mr. Glick responds
that Gerson Lehrman "would never let a store manager talk about his own company."
Applebee's subsequently informed associates "they shouldn't be talking about our business
to outsiders," Ms. DiRaimo says. Mr. Glick says Gerson Lehrman promptly stopped
recruiting from the chain.
Verizon Communications Inc. and Citigroup Inc. are among the companies that have
instructed Gerson Lehrman to quit contacting employees. But if Gerson Lehrman clients
want information about Verizon, they have alternatives. Gerson Lehrman can hook them
up with the telecommunication company's suppliers and resellers. Alvin Myers, who used
to manage big accounts for Verizon Wireless, listed his Gerson Lehrman consulting
position on a resume posted on Monster.com, the online job board, in September. Verizon
says "former employees and business suppliers" are prohibited from disclosing nonpublic
information. Mr. Myers, who worked for Verizon from 2004 until May, declines to
10/2/2007 6:47 PM

5 of 8

Seeking an Edge, Big Investors Turn to Network of Informants - WSJ.com

http://online.wsj.com/article_print/SB116459881353833275.html

comment.
Some companies don't know about employees who are also consulting for Gerson
Lehrman. Joseph Toedt consulted occasionally for Gerson Lehrman while working as a
first vice president in J.P. Morgan Chase's commercial card division. "I don't think the
company would have a problem with it," he said last month. His conversations with
investors, he said, were "generic and open-ended" ones about commercial credit cards.
When the Gerson Lehrman consulting gig was described to a spokesman for the bank (Mr.
Toedt wasn't identified), the spokesman said such an arrangement "would typically not be
permitted.... Any outside business affiliation must be preapproved by an employee's
business manager, the firm's compliance group and the office of the secretary." Mr. Toedt
has since left J.P. Morgan.
Mr. Glick, Gerson Lehrman's research director, argues that companies will eventually
conclude that there are benefits to cooperating with the firm. "Over time, companies will
want people doing this," he contends. "They will want their experts to be the experts."
The New York Times hasn't tried to stop Nicholas Ascheim, director of entertainment,
audio and video at its online division, from consulting for Gerson Lehrman. Mr. Ascheim,
whose affiliation with Gerson Lehrman predates his New York Times job, tells Gerson
Lehrman clients that he is speaking as a media specialist, not a Times representative, says
a spokeswoman for the Times, speaking for Mr. Ascheim. "Never has he been asked to
discuss anything about the New York Times," she says.
Now that his research firm is thriving, Mr. Gerson has handed over day-to-day control to
Mr. Glick and others. In 2004, he considered cashing out, retaining Morgan Stanley to
explore a possible sale. But after he talked to several potential suitors, Mr. Gerson says,
the effort stalled. "We wanted more money than they were willing to pay," he explains.
Mr. Gerson likes to keep numerous balls in the air and run on minimal sleep. In his spare
time, he pens articles for publications such as the New York Sun and Commentary.
Instinet's Mr. Nicoll recalls that on a flight to Tokyo, Mr. Gerson piped up from across the
aisle that he had an idea for an article, and he began typing on his laptop. On the flight
back, Mr. Gerson showed him a new issue of The Weekly Standard, which contained his
piece. Earlier this year, Mr. Gerson was deeply involved in Mr. Booker's winning
campaign for the Newark mayoralty.
At salon dinners Mr. Gerson regularly holds at his sparsely decorated Fifth Avenue rental
apartment -- events he says are unrelated to building his web of professional contacts -- he
spends most of his time listening to others talk. Although Mr. Gerson isn't gregarious, says
Mr. Glick, he "loves to connect people and watch them learn from each other."
The gatherings feature speakers, making them more like seminars than dinner parties. One
week in August, for instance, Mr. Gerson drew 70 or so guests over two evenings to hear
from Peter Thiel, a founder of the PayPal online-payment site, and from Jon Benjamin,
10/2/2007 6:47 PM

6 of 8

Seeking an Edge, Big Investors Turn to Network of Informants - WSJ.com

http://online.wsj.com/article_print/SB116459881353833275.html

Britain's acting consul general. In attendance were the Rev. Arne Panula, U.S. spiritual
director of Opus Dei, a conservative Roman Catholic institution, electronic musician
Moby and a slew of academics and investment professionals.
Mr. Gerson continues to network almost hyperactively on behalf of his firm, hopscotching
to Gerson Lehrman offices in London; Shanghai; Sydney, Australia; and New Delhi in a
hunt for new clients and experts.
Concerns about inside information, among other things, have caused some hedge funds to
approach his firm and its competitors, which include Standard & Poor's Vista Research,
with caution.
James Chanos, president of Kynikos Associates, a more than $3 billion hedge fund
specializing in "shorting" stocks, or betting against them, says he stopped using such firms
a couple of years ago. He says he "got increasingly uncomfortable" that the information
provided by the firms was either "too good to trade on or too pedestrian to care about."
Kynikos does its own research, he says, "because that's what our clients are paying us for."
Before engaging Gerson Lehrman consultants, Farallon Capital Management, which has
some $4.7 billion under management, has its lawyers chew over whether the consultants
are qualified to talk and whether they might qualify as insiders in the eyes of regulators,
according to people familiar with the firm. Farallon won't speak with anyone who has
worked during the prior year at any company it is targeting for investment, these people
say.
Steven Durkee began consulting for Gerson Lehrman in 2002 and has ranked among the
top 20% of its consultants in popularity, making him one of Gerson Lehrman's "scholars."
His specialty is retail. Over the years, he has worked for General Mills Inc. and
Sherwin-Williams Co., and consulted for Eddie Bauer Holdings Inc.
Among the Gerson Lehrman clients he has spoken to over the past two years, Mr. Durkee
says, are Afton Capital Management, Atlas Capital Management, Royal Capital
Management and FAF Advisors. All four firms declined to comment. These clients, he
says, wanted his views on Eddie Bauer, which was sold this month to two private-equity
firms. He says he kept up with the company through friends working there.
Early this year, Mr. Durkee, who is 54, took a job as a senior manager at Walmart.com. He
had to sign an agreement that barred him from continuing his $200-an-hour consulting gig,
so he put Gerson Lehrman "on the shelf." Nov. 3, he left Wal-Mart and plans to begin
consulting again.
"I have experience people are screaming to get ahold of," he says.
Write to Laurie P. Cohen at laurie.cohen@wsj.com10

10/2/2007 6:47 PM

URL for this article:

http://online.wsj.com/article/SB116459881353833275.html

7 of 8