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

By | 2013-07-16T09:36:44+00:00 July 16th, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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