Mosaic Theory

So I am reviewing Standard II A Material nonpublic info…maybe a rhetorical question but: if the mosaic theory (in lehman’s terms) states that analysts are free to act on the collection of info without risking violation of the standard- then why is the act itself, then a violation? Maybe, it’s a circle I can’t seem to get myself out of… Please advise…

It comes down to disclosure/record keeping. If the SEC starts sniffing around and you provide all records of research showing that the conclusion was reached in good faith, you are set. If you have no records because your buddy at the country club let something slip during a golf match, then that is material nonpulic and inside information.

It depends on acquired information being material or nonmaterial, public or nonpublic. Material and public – no breach. But pay attention, material information unveiled to a room full of analysts is not making it public, unless in some form it is distributed to the investors simultaneously (don’t necessarily expect the slowest of information delivery method to complete delivery) Material and non-public – breach Nonmaterial and nonpublic – no breach. But pay attention, when another analyst, a well-known or respected analyst, issues a report or changes his/her recommendation, that report alone might have a significant impact on the market and could therefore be considered material. Nonmaterial and public – no breach. Oh, and it also depends on how reliable the source is, how close to the information.

You all rock!

map1 tell me, if an analyst has info that a firm he is researching will probably have problems meeting its payable obligations would this be material or not? He got the info from talking to a few suppliers.

Yardy, That would not be nonmaterial nonpublic information. This is the heart of mosaic and the qualities of a great analyst. The penumbra of information from the suppliers points to cash problems of the firm.

You are the best!!

I think this would be material information, nonpublic. In order to use it, the analyst would have to urge the company to make it public, and only afterwards use it. The word “probably” is bothering me though. In any case, until publicly proven true or false by the company having difficulties, I think this information cannot be used, as the analyst would not have reasonable basis to formulate a recommendation. This would be a breach of Standard V.A., Diligence and reasonable basis.

I may be mistaken. I think getting information from the suppliers (even many of them) is NON-Public information. If he is able to identify the information by looking at the financials of the company, and able to arrive at it with his own research, it is information that he could use, under the mosaic theory.

i got the question for schweser 2007 pratice exams. I dont have it before me but if I can recall it said based on the info form the suppliers the copany is likely to be bankrupt. However in a case where he got this info from the supplier, who woud be the one to make it public? He should approach the comp.?

If the information would be nonmaterial AND nonpublic (like say the analyst is told by a doorman of the company that a large number of suppliers had a meeting with the CEO of the company), the analyst would be able to use it in his/her research. But if the information comes from the suppliers (even indirectly, say the analyst overhears suppliers comments on the company’s innability to pay while eating in a restaurant, at the next table), that’s making the information material and using it before made public by the company, or the suppliers, would be a violation.

Mosaic Theory says that you can use a combination of material public and nonmaterial nonpublic information, even if the sum of these components (the mosaic, if you will) would be considered material nonpublic information… This is the value added for skillful analysis and it is perfectly legal. Just keep records of where you got each piece of the pie from.

Yes, contact the company and urge them to make the info public. Yardy Wrote: ------------------------------------------------------- > i got the question for schweser 2007 pratice > exams. I dont have it before me but if I can > recall it said based on the info form the > suppliers the copany is likely to be bankrupt. > > However in a case where he got this info from the > supplier, who woud be the one to make it public? > > He should approach the comp.?

tell you what I will get the exact circumstance of the case for you 2maro. Cuz for some reason the analyst wasn’t in violation based on the answer.

I recall a case where the analyst was told by a senior sourse inside a major customer customer of a company that the company was about to lose the customer. It was non-public but still not material evenn though it was a major customer, because the company may have been putting on new customers at the same time. For all we know the company may have been deliberately dropping the customer for some reason. What the source thinks is material (even if it’s a reputable source), doesn’t necessarily make it material info. Info from suppliers about a company not being able to pay debts may be public or non-public, but unlikely to be material. Depends on the degree. Eg a formal meeting of creditors: these aren’t public meetings but the fact that there is a meeting is often public info. But a series of private comments from a number of suppliers that they are having problems with payment wouldn’t be material. The analyst might conclude from all these discussions that the company is in default - and the company may in fact be in default (material), but this is the mosiac theory at work - therefore OK to use.

Ok, so I found a question that is relevant to our above discussion: Alan Ward is an analyst who follows Winkle Corp. During recent discussions with management, he heard comments by several people that seemed strange at the time but were not significant enough to follow up on. When the comments were subsequently combined with analysis of public information, however, Ward came to the conclusion that a takeover bid for Winkle was imminent. Which one of the following statements is true? (a) The comments are not material nonpublic information. (b) By combination with the public information, the comments have become material nonpublic information. © Ward must report whoever made the comments to those persons’ superiors. (d) Ward must urge Winkle to publicly disclose the takeover bid.

As promissed here are the details of the case. Carter works for a wall St. inv. bank as an anlyst for the consumnr goods industry. He is preparing a research report on CB a US based company. CB was once a market leader but has suffered several yrs of lackluter sales after the death of its founder. After reviewing industry stats and consulting with several suppliers, carter believes that the company may soon face bankruptcy. B4 carter can issue a sell recomendation in his report carter is required to: a) take no additional action b) wait unitl suppliers contact other analyst about CB c) make fulll disclosure of the investigation with suppliers to the complince officer at this firm d) cantact CB manageent and urge them to disclose the result of the conversation with CB.

Yardy, I would say (a). (b) has no relevance to his report, © the information that he found by discussing with suppliers is nonmaterial, indeed it becomes material when he corroborates it with industry stats but this is the core of the Mosaic Theory, (d) makes no sense into urging the company to make public their private discussion.


“A” indeed correct.