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Mosaic theory (investments)

Overview (existing)
The mosaic theory in finance involves the use of security analyst personnel to gather information about a company or corporation. In addition to the public information provided to investors, the analysts have access to non-public, non-material information that can draw out a more precise conclusion about a company or corporation. Security analysts make recommendations to their clients based on determining the underlying value of a company’s securities. Since the Commission’s Fair Disclosure rule (Reg FD) was enacted, the viability of the mosaic theory has been retained within the United States under the Securities and Exchange Commission. Though it was not created by the Securities and Exchange Commission, it has a judicially imposed limitation on the information gathered by insider trading. The Securities and Exchange Commission explains that this nonpublic information, known as research to the security analysts, isn’t banned from “disclosing a non-material piece of information to an analyst, even if, unbeknownst to the issuer, that piece helps the analyst complete a "mosaic" of information that, taken together, is material”. 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. Some of the controls that have mitigated the potential of illegal trading within the mosaic theory include the interactions between a company and consultants, notification in connection with approved consultants, remaining alert to potential issues, compliance oversight, information barriers, and being within the SEC guidelines.

Legality of the Mosaic Theory (new)
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 analysts. Securities analysts can obtain non disclosed information from company insiders that an average investor cannot. Under insider trading law, this advantage is an unlawful method. To combat this issue, confidentiality agreements as well as operating under internal policy guidelines are in place.

Court Cases (new)
In May 2011, US District Judge Richard J. Howell sentenced Raj Rajaratnam, the founder of the Galleon Group hedge fund, was sentenced to eleven years in prison was found guilty of fourteen counts of insider trading. Though it was ten years shorter than the requested amount of time, it constitutes as the longest prison sentence given to an insider trading case. Under the Securities Exchange Acts15 USC §78j(b) and 17 CFR §240.10b-5, Rajaratnam and other Galleon traders were convicted with fraud and conspiracy. They profited tens of millions of dollars of insider trading and based their arguments off of the mosaic theory.