By BRODY MULLINS And SUSAN PULLIAM

WASHINGTON—At a breakfast fund-raiser last year at the Liaison Capitol Hill hotel, former lobbyist Paul Equale pulled up a chair next to Sen. Richard Durbin. As they chatted, the Illinois Democrat told him about a recent breakthrough in his efforts to push through a bill to cap debit-card fees.

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Melissa Golden for The Wall Street Journal

Paul Equale is a consultant for a firm that connects Wall Street investors with Washington insiders.

In Washington, such shop talk between political insiders is so routine that it hardly warrants mention. For Mr. Equale, however, it yields intelligence that fetches good money on Wall Street.

Mr. Equale works as a consultant for Gerson Lehrman Group Inc., which connects Wall Street investors hungry for information with Washington insiders who possess it. After hobnobbing with Mr. Durbin, Mr. Equale shared his conclusions about the debit-card legislation with hedge funds including Perry Capital and Jana Partners. Both funds subsequently traded in the stocks of Visa Inc. and MasterCard Inc., according to regulatory filings. It is unclear what role Mr. Equale's report played in their investment decisions.

Information about what's happening in Washington is at a premium on Wall Street these days. Government regulatory changes and economic initiatives following the 2008 financial crisis have affected numerous industries, and even minor shifts in policy can be of interest to hedge-fund managers. When the health-care bill was snaking its way through Congress in 2009, for example, hedge funds wanted to know about every twist and turn. They followed the debt-ceiling showdown over the summer just as closely.

Keen for information about what's happening behind the scenes, hedge funds have been drilling ever deeper into the government. Thousands of political insiders are being paid by hedge funds, private-equity firms and other big investors. Former Federal Reserve Chairman Alan Greenspan, for example, is an adviser to Paulson & Co., and former Treasury Secretary John Snow works for Cerberus Capital Management. SAC Capital Advisors and Eton Park Capital Management have hired former congressional staffers.

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Some investment groups contract with lobbyists to pass along information they pick up during conversations with lawmakers, congressional aides and other government officials. "I have information from doing my day job as a lobbyist," explains one lobbyist. "That information has value on Wall Street. So I sell it."

Securities laws generally prohibit trading on the basis of material nonpublic information about public companies, if the person with access to the information has a duty to keep it secret. Expert networks that traffic in corporate information have attracted government scrutiny. Prosecutors have charged five consultants at Primary Global Research LLC, an expert-network firm in Mountain View, Calif., with violating those prohibitions.

Securities laws don't, however, bar most political insiders from sharing nonpublic information about government affairs. On the contrary, part of the job of lawmakers, staffers and lobbyists is to discuss policy options and pending legislation with anyone who might be considered an interested party. "A legislator normally talks to a lobbyist without any expectation that the information will be kept confidential," says Karl Groskaufmanis, a lawyer at Fried, Frank, Harris, Shriver & Jacobson LLP in Washington who focuses on securities regulations.

"The ultimate [investing edge] is insider information, so you want to get as close to the line as possible without crossing the line," says Sanford Bragg, chief executive officer of Integrity Research Associates LLC, which evaluates investment-research firms. "That's why Washington is so interesting—because there is no line."

Insider-trading rules are more restrictive in the Executive Branch, but enforcement is difficult. Over the years, there have only been a few insider-trading cases involving nonpublic information from federal agencies. Federal prosecutors recently charged a chemist at the Food and Drug Administration with trading on inside information about drug-approval decisions that moved pharmaceutical stocks.

Political "expert networks" like the one Mr. Equale works for have emerged as a big business. Companies like Gerson Lehrman, Coleman Research Group Inc. and Public Insight LP offer investors the chance to talk one-on-one with any of a roster of experts on various aspects of government. More than 2,000 people work for expert-network companies in the capital.

The political-intelligence industry has become a roughly $100-million a year business in Washington, according to Integrity Research Associates.

Gerson Lehrman, the largest expert-network firm, says political consulting is growing. The firm has assembled a global roster of more than 300,000 experts on a wide variety of subjects. Hedge funds and other investors pay up to $240,000 a year for unlimited access to the Washington experts. Most Gerson experts, who aren't technically employees, charge between $200 and $1,000 per hour to talk to clients.

Mr. Equale, who is 60 years old, runs a small consulting firm that, among other things, helps companies navigate regulatory channels in Washington. He has been in Washington since the 1970s, when he worked for the Energy Department during the Carter administration. He served as a top lobbyist for an association of insurance agents before going out on his own. Over the years, he has donated personally more than $70,000, mostly to Democrats.

His work for Gerson Lehrman, which began in 2005, is a side job—a lucrative one. Gerson pays him $600 an hour for passing information and advice to Wall Street investors. He has done that some 650 times, he says, earning himself about $400,000. "It's put my kids through college," he says. On one particularly good day in spring 2010, he earned $5,200 in a few hours during a break from his vacation at his beach house on the Outer Banks of North Carolina.

One day recently, Mr. Equale logged on to his laptop, called up a private Gerson Lehrman Web page and scrolled through a list of investors that had consulted him. Some are identified only by numbers, others by name: Goldman Sachs Group Inc. and hedge funds Och-Ziff Capital Management Group, Viking Global Investors and Third Point. Gerson's clients indicate online what kind of information they are looking for. Experts like Mr. Equale reply with information about their expertise and their backgrounds, and certify that they won't illegally divulge inside information. Investors decide to whom they want to speak.

"Modern government is so complicated even the smartest people on Wall Street need an interpreter to fully understand the political discourse in Washington," Mr. Equale says. "I am their interpreter."

Last year, the financial-services industry was worried about an amendment being pushed by Mr. Durbin in the Senate to cap the fees banks and credit-card companies, including Visa and MasterCard, collect from retailers on debit-card purchases. Analysts warned that the provision, attached to a rewrite of financial regulation in the Senate but not the House, could cost the credit-card industry billions in debit-transaction revenue. It was pummeling the firms' share prices. Wall Street wanted more information about what to expect.

Mr. Equale paid $1,000 to attend a campaign fund-raiser in May 2010 for Senate Majority Leader Harry Reid, a Nevada Democrat. A number of senior Senate Democrats, including Mr. Durbin, attended.

When Mr. Equale sat down with Mr. Durbin, he says, the senator told him something not widely known at the time: His amendment was gaining traction with a crucial House lawmaker, Financial Services Committee Chairman Barney Frank (D., Mass.), who previously had publicly opposed the provision. A spokesman for Mr. Durbin said the senator doesn't recall the conversation.

Mr. Equale says he doesn't relay to investors details of his private conversations with politicians. Based in part on his talk with Mr. Durbin, he says, he concluded that the chances were good the fee-cap provision would become law, which would be bad news for credit-card companies.

In a flurry of calls following the event, Mr. Equale says, he shared his opinion with a number of hedge-fund analysts, including at Perry Capital and Jana Partners. Later, he says, he told hedge funds he thought the Fed would propose a tough fee cap at first, but would ultimately water it down.

Just how useful the funds regarded Mr. Equale's intelligence is difficult to know. At that time, markets appeared to have reached the conclusion—even without the information Mr. Equale gleaned from Mr. Durbin—that the fee-cap provision would pass in some form.

Shares of Visa and MasterCard dropped in December after the Fed initially proposed a tougher-than-expected cap. In the fourth quarter, Perry snapped up 400,000 shares of Visa and 90,000 of Mastercard, public filings indicate. Jana bought about 1.6 million sh ares of Visa.

The outlook brightened in the first quarter when lawmakers pressed the Fed to soften its proposal. Perry and Jana sold their positions in the first quarter of 2011, public filings show. In June, shares of Visa and MasterCard surged when the Fed's final rule set a less-restrictive fee cap of about 21 cents per transaction, almost double its initial proposal. Visa and MasterCard have been among the best performing stocks this year.

Late last year, Mr. Equale also doled out information about the likelihood of Congress legalizing gambling over the Internet. In 2006, Congress had essentially banned online gambling in the U.S. by prohibiting credit-card companies from processing payments from online gaming sites. Four years later, under pressure from the industry, including some U.S. casino companies, a House committee approved legislation to legalize Internet gambling. When Nevada's Mr. Reid, the Democratic leader of the Senate with close ties to the gaming industry, won a close re-election last year, many on Wall Street thought a bill was in the bag.

In December, Mr. Equale attended a small gathering Mr. Reid hosted for longtime supporters in Las Vegas. Although he didn't discuss the issue directly with the senator, he says, he talked about it with two top supporters whom Mr. Reid routinely consults.

According to Mr. Equale, they concluded that it wouldn't be politically smart for Mr. Reid to push for a vote at that time on a bill narrowly benefiting the gambling industry.

"Here is what [investors] didn't know and I did: Reid was never really going to do this," Mr. Equale says.

Mr. Equale shared that conclusion with hedge fund D.E. Shaw. Once again, it is unclear how the information factored into the fund's investment decisions. During the fourth quarter, the fund increased its holdings in MGM Resorts International to 304,529 shares, from 67,822 in the prior quarter. Shares of MGM jumped from $9 at the beginning of September to nearly $15 at the end of the year, due in large part to persistent rumors about the legislation, analysts say. Mr. Equale's prediction that the legislation wouldn't come to a vote proved correct, and shares of MGM trailed off to below $13 by the end of March.

In some cases, Mr. Equale's predictions are based on little more than his reading of how the politics of a situation will play out, something he calls "sniffing the air."

H&R Block Inc., the tax-preparation company, disclosed on Dec. 24 that an obscure government agency had blocked the line of credit it uses to fund "refund-anticipation loans" for customers—consumer loans that were under fire for their high interest rates. Investors figured the decision would hurt the company's earnings during the 2011 tax season, and shares fell 7% the first full trading day after the disclosure.

Mr. Equale figured the government would eventually allow H&R Block to replace the financing. Republicans had taken over control of the House and were unlikely, he thought, to allow a crackdown on the industry. The incoming chairman of the Senate Banking Committee, Sen. Tim Johnson, had a good relationship with the financial-services industry.

In a Jan. 17 phone call, Mr. Equale shared his views with Watershed Asset Management. During this year's first quarter, when H&R Block stock was trading as low as the low teens, Watershed bought 510,300 shares and an options contract to sell 510,300 shares at a future date at a predetermined price.

The stock began rising in early January and continued until April, partly due to the expectation that H&R Block would line up alternate financing. Since then, the stock has slipped, in part due to a settlement with regulators regarding its subprime lending business.

H&R Block announced on Sept. 13 that it won't offer refund-anticipation loans during next year's tax season.

Watershed sold its shares in the second quarter but continued to hold the options contract on 510,300 shares, according to the most recent public filings by the hedge fund.

That kind of insider's political perspective "is the sort of stuff they want," Mr. Equale says of investors. "I teach them how democracy works."

—Maya Jackson-Randall contributed to this article.

Write to Brody Mullins at brody.mullins@wsj.com and Susan Pulliam at susan.pulliam@wsj.com