Regulators might be moving to crack down on the illegal trade of market-moving information from companies, but hedge funds are tapping a rich source of inside tips and predictions: politicians and the politically connected, reports The Wall Street Journal.

The hedge funds are hiring lobbyists for their so-called "political intelligence units" to pick up market-moving information. The lobbyists, many of them lawyers with public policy expertise, are charging anywhere between $5000 and $20,000 a month for passing on the information. For the hedge funds, it's just a small investment that can deliver big profits.

The WSJ reports that they can pick up market-beating tips on for example Internet gaming, Medicaid reimbursement, foreign ownership of US ports and corporate tax legislation. Will Congress for example approve new regulations for Fannie Mae and Freddie Mac? Which airline will win from the Transportation Department a new daily nonstop flight to China? Will the FDA approve a new prescription drug? And so on.

One of the most alarming examples is asbestos. Last month, Senate Majority Leader Bill Frist delivered a speech promising a full Senate vote on a bill to create a $140 billion public trust fund for asbestos liability claims. The stock price of companies that used asbestos went up two days prior to the announcement.

Reports the WSJ: "Employees of publicly traded companies are tightly bound by insider-trading laws, which also ban investors from trading public securities using material, non-public information that has been passed on improperly. But in most cases, members of Congress and their aides don't have a duty under the law to keep information private. They routinely exchange information about politics and policy with lobbyists - often not realizing that mere morsels are being sold to hedge funds who trade on the tidbits.

"The growth in the market for political intelligence in the last 18 months has been dramatic, says Elliott Portnoy, a lawyer and lobbyist who founded an intelligence practice for Chicago-based law firm Sonnenschein Nath & Rosenthal LLP, and now has been elected the firm's chairman partly based on his unit's performance. 'There are a lot of savvy investors who have realized that there is a lot of money to be made from what Congress does,' he says. Since 2004 his unit has tripled the number of its clients to two dozen and tripled its staff to 18. He says his clients include wealthy private investors, private-equity funds, investment banks and hedge funds, though he won't disclose names.

"Clint Carlson, who runs Carlson Capital, L.P., a $3 billion Dallas-based hedge fund, says the firm deals with a number of lawyers with Washington expertise in order to track public-policy developments. He adds, 'You have to watch the line. If you're worried it might be inside information, it's best not to use it, even if it is legal.'

"Some congressional staffers say they now receive nearly as many phone calls from lobbyists asking about the status of legislation as they get from lobbyists asking to change legislation. "The amount of insider trading going on in these halls is incredible," says one aide to a Republican lawmaker."

The Securities and Exchange Commission is reportedly looking at whether laws are being broken somewhere in the transfer of information between Congress and Wall Street. Sure, it's not illegal for lawmakers to disclose information that isn't publicly known about the workings of Congress, even if it could affect stock prices. The only time there is an ethical breach is when they or their aides profit directly. The big question for the SEC is whether the passing of market-sensitive information by lobbyists to investors could violate insider-trading law.

That's a tough one because insider trading is fluid and opaque. As Linda Chatman Thomsen, the SEC's director, Division of Enforcement, said in her testimony on insider trading, tracking down the culprits is complex, time-consuming and often fruitless.

"It is rare to find a "smoking gun;" virtually all insider trading cases hinge on circumstantial evidence. It is quite common for insider traders to come up with alternative rationales for their trading-rationales that the staff must refute with inferences drawn from the timing of trades, the movement of funds and other facts and circumstances. And because many insider trading cases involve secret communications between two people - the tipper and his tippee - assembling compelling circumstantial evidence is often difficult. In some cases, such as when a corporate insider trades on company information or when an outsider steals nonpublic information, there are no communications at all to use as evidence at trial, but only the facts of the wrongdoer's access and trading."

Even where there is insider trading, it's hard to prove a link. Wealthy traders on Wall Street have long been able to gain an advantage in the market by getting access to better information. In the 1980s, for example, disgraced trader Ivan Boesky used lobbyists in Washington to tell him if Congress would block Standard Oil's takeover of Gulf Corp, and cashed in on that information. Boesky later went down in one of Wall Street's biggest insider-trading scandals but prosecutors didn't pursue him over the snippets and market gossip he received in Washington.

Besides, the lobbyists and funds would argue that a lot of the information is already in the public realm, so what's the problem?

To my way of thinking, the only way you can address this problem is to have more disclosure about the links between Washington and lobbyists. The lobbyists would have to disclose more information about their clients, and vice-versa.

Otherwise, Washington will continue to fuel flagrant insider trading.