Definition

• The classical theory of illegal insider trading under the U.S. securities laws holds that a relationship of trust exists between the shareholders of a corporation and those of its employees who have obtained confidential information through their position with that corporation, and that if an employee trades on that information she violates that trust, taking advantage of uninformed stockholders.
  
  Under this theory, the crucial considerations are how the individual obtained the information, how material it was to the value of the stock and whether in fact the individual relied upon it.
  
  

Accountant

• During the period when a patent is pending, a corporation may prefer to keep the bases of the application, the underlying technological innovation, secret. As Gautam Ahuja, a professor of business administration as the University of Michigan School of Business, and two colleagues argued in a 2005 paper, this may be necessary so that "rivals cannot imitate or reverse engineer the breakthrough."
  
  If an accountant learns of this breakthrough in the course of his employment during this period, then it is very likely that courts or administrators will find that this news is inside information, i.e. special knowledge acquired by virtue of a confidential relationship, and that he will not be free to exploit that knowledge for his own personal benefit.
  
  

Materiality

• If an accountant is accused in a civil or criminal proceeding of illegal insider trading on the basis of information about a patent, and she did in fact know about the patent, she might argue that the information was not material, but only part of a broader "mosaic" of information that led to her decision to buy. Each individual piece of the mosaic, including the patent datum, was (according to this defense) immaterial in itself.
  
  

Causation

• In the alternative, she might argue that the patent datum played no role, not even as a piece of a mosaic, that she bought the stock on the basis of other information and so would have bought it anyway regardless of the datum about the patent.
  
  As Linda Thomsen Director of the Division of Enforcement at the Securities and Exchange Commission, testified before the U.S. Senate Judiciary Committee in September 2006, "It is quite common for insider traders to come up with alternative rationales for their trading -- rationales that the staff must refute with inferences drawn from the timing of trades, the movement of funds and other facts and circumstances."