Mosaic Puzzle Theory


The reported investigation of a Goldman technology analyst highlights how far the grey area around confidential information has expanded. Does mosaic theory still provide the same level of protection it once did?  Stay tuned.

The Wall Street Journal reported today that federal criminal authorities are investigating whether technology analyst Henry King, head of Taiwan Research for Goldman Sachs Asia, leaked inside information to asset management clients.  Although it is not clear whether charges will be brought, the news has a chilling effect on analysts.

The news media has cited the Taiwan connection in insider trading cases brought earlier.  The first employee of Primary Global Research (PGR) to be indicted was their Taiwan liaison, Don Ching Trang Chu.  One of the PGR experts, Manosha Karunatilaka, was a manager at Taiwan Semiconductor, albeit located in Burlington, Mass.  Winifred Jiau, a PGR expert convicted of passing inside information on Marvell Technology Group Ltd. and Nvidia Corp was denied bail because she was deemed a flight risk to Taiwan.

However, the more interesting question revolves around the basis on which prosecutors might bring a case.  When you look over the who’s who of those involved, you see that some of the cases involve confidential information which may or may not have been material.

For example, Manosha Karunatilaka, the manager at Taiwan Semiconductor, pleaded guilty to passing on bookings information about clients of Taiwan Semiconductor.  This was clearly confidential, but not so clearly material.  Bookings represent advance estimates, usually months before actual orders, of potential demand.  These represent much softer information which is more subject to analyst interpretation than, say, non-public revenue or sales numbers.

Similarly, Walter Shimoon, another PGR expert who was an employee of Flextronics International, pleaded guilty to passing on confidential information about design features of Apple’s latest i-Phone.  And as we have noted in the past, the trial of one of PGR’s salespeople, James Fleishman, centered on his guilt in causing experts to breach their fiduciary duties of confidentiality rather than the materiality of the information.

Which brings us back to Henry King, Goldman’s highly acclaimed technology analyst.  A random web search brings up the following Bloomberg summary of a report issued by Henry King September 27, 2010:

“Apple may introduce a new version in the second quarter of 2011, according to analysts at Goldman Sachs Group Inc.  The new iPad with a 9.7 inch display may be thinner and lighter, with a built-in camera and mini USB drive, analysts Henry King in Hong Kong and Kevin Lu in Taipei said in a report. Hon Hai Precision Industry Co, the world’s largest contract maker of electronics, will likely be the supplier, they wrote.”

To prosecutors, flush from steamrolling 56 people of 64 charged so far, this looks like red meat.  After all, many of the hides on their wall are from breaches of confidentiality, and which company is more circumspect in its product information than Apple?

To analysts and investment professionals, on the other hand, King’s report looks like channel checking.  If King was careful about not inducing others to breach their duties of confidentiality, he should have no problems, should he?  Therein lies the question.



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