Confidential information is very important to most of us in the merchant banking industry since we are continually reviewing the prospects of public companies, private companies, and individuals ideas. This is an issues that we all need to be aware of and know what the SEC is focusing its enforcements on.
the “mosaic” theory
When I became a securities analyst in 1978, the mosaic theory was what was commonly understood as being an adequate defense for an analyst accused of trading on inside (that is, material, non-public) information.
An example: I’m interviewing the CFO of a large company I know is in negotiations over a very lucrative project in China. This firm has a smaller, publicly traded partner, for whom this project could, say, triple its earning power. After a series of questions, I tell the CFO that I’m estimating the company’s interest expense for next year will be $200 million. I ask if this sounds right. He responds that it will more likely be $250 million.
I know the company’s cost of debt is about 5%, so the added interest expense means new borrowing of $1 billion. The only reason to do so would be to fund the China project…
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