Mosaic Theory in Question?


New York, NY – A few weeks ago, in a panel discussion on insider trading held at the Pierre Hotel in New York City, a number of controversial comments were made, which when taken in combination, suggests that federal authorities doubt that the mosaic theory, which many securities analysts rely upon to conduct rigorous research, is an appropriate defense in a potential insider trading investigation.


The panel discussion in question took place at the Regulatory Compliance Association’s, annual Compliance, Risk & Enforcement 2012, conference held at the Pierre Hotel in New York City on December 18th.   The panel, entitled, Insider Trading and Enforcement – The Continental Divide™ included an extremely experienced group of current and former regulators, federal authorities, and private practice attorneys specializing in insider trading law.  The following is a list of the panel participants.


Kevin Scanlan, JD, Partner Dechert


Bruce Karpati, JD, Chief, Market Abuse Unit, Enforcement, SEC

Dave Chaves, Supervisory Special Agent, Federal Bureau of Investigation

Reed Brodsky, JD, Assistant US Attorney, US Attorney’s Office Southern District of New York

Jonathan Streeter, JD, Partner Dechert

Adam Wasserman, JD, Partner, Dechert

Steven Yadegari, JD, EVP, General Counsel, Cramer Rosenthal McGlynn

Concerns about Materiality Misplaced

The panel discussion got off to an uneventful start as panelists discussed their views about the definition of insider trading.  Assistant US Attorney Reed Brodsky stated that in his opinion, the most important issue in US insider trading law was the concept of “breach of a duty” where information is provided by a tipper (or obtained by a tippee) with the knowledge that they breached a duty to do so.

Brodsky added that anyone who had to rely on their assessment whether the information they received was not material, even if a duty was breached to obtain it, was potentially in trouble with federal authorities.  He noted that “breach of duty” was the concept that hedge fund managers should focus on.

This prompted Dechert partner Adam Wasserman to jump in and argue that this analysis was too simple and didn’t enable hedge funds to meet their fiduciary obligation to investors by maximizing fund returns.  He had two issues, the first was that in many cases hedge fund analysts might not know whether a third-party consultant or analyst they hired had breached a duty to obtain the information they provided them.  In addition, Wasserman wondered whether Brodsky’s approach voided the mosaic theory.

Brodsky acknowledged these issues, but stuck to his view that hedge funds needed to focus on making sure that the information they traded on was not obtained in breach of a duty rather than worrying about whether the information was material or not.

Mosaic Theory Questioned by Feds

Jonathan Streeter, a partner at Dechert, a former Deputy Chief of the Criminal Division and Assistant U.S. Attorney in the Southern District of New York, and the lead trial counsel for the government in the Galleon case, entered the discussion with a very unique insight.

Streeter noted that both the SEC and federal authorities held a very dim view of the mosaic theory due to how it had been used by defendants in insider trading cases.  Streeter noted that one such example was the Galleon case, where the defense for Raj Rajaratnam tried to convince jurors that the insider information he collected was only a small part of the investment mosaic that he had developed.

Consequently, Streeter explained that cases like Galleon had made the feds rather cynical when presented with the mosaic theory as a defense for insider trading.


So, did this panel discussion reveal that US regulators and federal authorities no longer think that materiality or the mosaic theory matters?  Absolutely not.  However, this discussion does reveal the personal views of some important players regarding insider trading and how they view issues like “duty of confidentiality”, “materiality”, and the “mosaic theory”.  It also reveals that the US government is becoming more confident in its ability to identify and root out activity they see as crossing the line.


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