Mosaic theory (investments)

The mosaic theory in finance involves the use of security analyst personnel to gather information about a company or corporation to evaluate and determine its financial stability.

By gathering various non-material information, often from sources at or close to the issuing corporation, an analyst can draw useful conclusions about the current and future health of the company, allowing them to profit from transacting in shares of its stock and related derivative contracts.

[3] Broadly speaking, the SEC requires public corporations to register their stock sales and protects investors in the municipal securities markets.

Though it is legal under the United States Federal insider laws to utilize the mosaic information that is obtained by a securities analyst, it must be within the guidelines of the confidentiality that the company or corporation created.

[4] Though the Supreme Court recognized the legality of the Mosaic Theory in Dirks v. SEC, the concerns have arisen with the potential of illegal insider trading happening within analysis.

[4] Without public corporations being transparent, the mosaic theory would be ineffective and the stock market would be vulnerable to sudden shifts as hidden information comes out.

[4] In May 2011, US District Judge Richard J. Howell sentenced Raj Rajaratnam, the founder of the Galleon Group hedge fund, to eleven years in prison who was found guilty of fourteen counts of insider trading.

[6] During the high-profile trial of investor Raj Rajaratnam, defense attorneys used the mosaic theory to argue against allegations of insider trading.