A brilliantly reported piece in today’s WSJ lays bare a mysterious industry: political research and intelligence. Well-connected firms like Marwood Group, founded by Ted Kennedy Jr., use relationships and experience in Washington to offer advice to hedge funds and other investment companies on how upcoming political decisions might affect a company’s stock or a particular investment. It’s a business that has very little oversight but can mean big wins or losses for Wall Street.
The political-intelligence business has expanded rapidly over a decade as government decisions have come to play a growing role for some on Wall Street. Investors spend more than $400 million a year for such intelligence, according to Integrity Research Associates, which follows the research industry. Its founder, Michael Mayhew, said hedge funds tell him the “single largest source of gains for them has been what’s going on in Washington.”
One case under investigation by the SEC involved a diabetes drug that many expected the FDA to approve in 2010. Marwood, drawing on connections to FDA officials, public records, and its analysts’ experience in the drug-approval process, guessed correctly that the drug would hit roadblocks. Some of its clients agreed with that analysis and made their stock bets accordingly; others thought it was bunk. Those that agreed made millions of dollars when the drug ran into problems and the company’s stock dropped 46 percent in one day.
The WSJ piece does not allege wrongdoing, but Marwood and similar firms operate in a gray area. This new class of companies will, for a fat fee, tell Wall Street fat cats how agencies like the FDA are leaning on regulatory decisions. The SEC is investigating Marwood, but however the investigation goes, it’s clear that there are deep problems with an industry in which lots of money changes hands and consultants come under lots of pressure to provide inside information.
The piece is well worth a read for everyone, but especially important for people interested in the health care industry. Lurking in the background of the political and regulatory processes of our changing health care system, savvy Wall Street companies and research firms are scrutinizing every move. Millions of dollars are at stake for those who can get a jump on the competition.