The Mosaic Theory of Materiality – Does the Illusion Have a Future?

Securities Regulation Law Journal, Forthcoming

Northwestern Law & Econ Research Paper No. 14-05

51 Pages Posted: 19 Feb 2014 Last revised: 16 May 2015

Date Written: May 13, 2015


The mosaic theory of materiality provides that a corporate insider who discloses inconsequential information to an outsider who in turn uses that information to complete a material mosaic about the corporation does not violate Rule 10b-5 when trading based on that mosaic. The SEC and commentators support variants of the theory; the concept has never been directly applied in a reported case. Developing insider trading law tends to support the SEC’s qualification that Rule 10b-5 is implicated if the insider knows that the information that is inconsequential standing alone will complete the outsider-tippee’s material mosaic. Commentators who read enforcement actions taken by the SEC and judicial decisions as undermining or even rejecting the theory have misread those developments?the theory has vitality and the SEC has not backed off from its recognition of it.

In practice, however, any insider tempted to provide an outsider with what the insider thinks is immaterial nonpublic information runs a substantial risk that he will be charged with tipping and may have an uphill battle defending the charge. Similarly, the resourceful analyst or investor who seeks to obtain trifling scraps of information from an insider must take into account what the insider knows about what the interlocutor already knows about the company and thus whether any disclosure will be an unlawful tip. What in theory appears to afford a viable means to fend off a charge of unlawful insider trading may be illusory in application.

Keywords: materiality, mosaic, insider trading, 10b-5

JEL Classification: K10, K19, K20, K29

Suggested Citation

Horwich, Allan, The Mosaic Theory of Materiality – Does the Illusion Have a Future? (May 13, 2015). Securities Regulation Law Journal, Forthcoming, Northwestern Law & Econ Research Paper No. 14-05, Available at SSRN: or

Allan Horwich (Contact Author)

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States

ArentFox Schiff ( email )

233 S. Wacker Drive
Suite 7100
Chicago, IL 60606-6473
United States

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