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In two recent criminal trials in the U.S. District Court for the Southern District of New York, defendants have raised the so-called “mosaic theory” defense to charges of securities fraud. Both defendants were ultimately convicted. Both trials offer lessons about the contours of the defense. Is the mosaic theory a viable defense after the Rajaratnam and Whitman trials?

Origins of the Mosaic Theory

In general, in order to rise to the level of insider trading, a trade must be based upon confidential, nonpublic information that is “material.” A statement or omission is deemed material when there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” (See TSC Indus. v. Northway, 426 U.S. 438 (1976); Materiality is a mixed question of law and fact and is usually determined by the jury.)

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