When an analyst reaches conclusions about a firm’s impending announcements before the actual release of information, using non- material, non- public information in conjunction with public information, insider trading charges cannot be leveled against her.

When an analyst reaches conclusions about a firm’s impending announcements before the actual release of information, using non- material, non- public information in conjunction with public information, insider trading charges cannot be leveled against her.

This arises from a legal defense against insider trading charges known as:
A . the Shingles Theory.
B . the question is based on false premise. The analyst can be held responsible for insider trading if she uses any inside information in her conclusions.
C . the Insider Legal Statute.
D . the Mosaic Theory.

View Answer

Answer: D

Explanation:

Insider trading charges arise only when the inside information used is material and non- public. Analysts who use non- material inside information in conjunction with publicly available data to draw conclusions which happen to be the same as those that would be derived given material inside information are shielded from insider trading charges under the "Mosaic Theory." The logic behind the defense is that investment analysts are exposed to a wide variety of public information (i.e., a "mosaic of information") and already have a good idea about what the information means. Further, the inside information, when non­material, cannot (by definition) have been the primary shaper of the final conclusions. Hence, the possession of the inside information makes only marginal contribution to the conclusions and as such, should not trigger insider trading violations.