Crossing the Line

How close?

How close can investors come to eliciting inside information from networks of informed insiders without crossing the line into insider information? Or how far away do they need to stay away from the line?

In securities law there is a notion of insider trading known as the “mosaic theory.” This doctrine states that if an analyst compiles non-material non-public information and material-public information to derive some special insight, he or she is not guilty of insider trading. But what constitutes non-material information? Clearly, concrete earnings and sales figures are material, as is a pending patent approval, or a federal contract award. So how close is too close?

I would submit that this is the wrong question. It’s like getting “one for the road” and calculating body-weight and proof-rating to determine just how much you can drink and still not be legally drunk. Do this enough times and someone will get killed.

If a behavior would embarrass you (or your boss or your firm) if it were published on the front page of tomorrow’s newspaper, don’t go there. Don’t go near that line, or 50 feet from that line. Just walk away.

Douglas R. Tengdin, CFA

Chief Investment Officer

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