Galleon Case Puts Mosaic Theory On Trial

Galleon’s Raj Rajaratnam goes to court today in the biggest insider trading trial since Gordon Gecko. If he’s convicted, the foundations of investor relations could be shaken to bits. 

Rajaratnam’s defence rests on the mosaic theory of investing. And without the mosaic theory, investor relations would be nothing but paper pushing. 

In the era of Regulation FD, every kind of one-on-one communication with investors and analysts, from phone calls to emails to conference breakouts, rests on the mosaic theory. The theory says that investors and analysts can gather little bits of non-material information and piece them together to form a material conclusion. 

‘Throughout his career Mr Rajaratnam has worked tirelessly as permitted by the securities laws to build a mosaic of public information about the companies he follows,’ John Dowd, Rajaratnam’s lead trial lawyer, has been repeatedly quoted as saying. 

Around the world of hedge funds and the expert networks that work for them, everyone’s wondering whether such mosaic investing could be deemed insider trading. IROs should also be wondering whether the ‘value-add’ and ‘colour’ they and their senior management are constantly communicating in between their 10Qs are going to come into question. 

Of course, the Galleon case goes far beyond innocuous crumbs of information passed on in controlled situations. Rajaratnam is alleged to have received tips from insiders about mergers, big investments and earnings surprises – tips that meet the traditional definition of insider trading. 

Ever since the Galleon case broke in late 2009, IROs have viewed it all with surprising sanguineness. The trial might well open their eyes.

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