Insider Trading: Proving You Didn’t Know Information Was Material and Nonpublic

You’ve spent years building expertise in your industry, learning to read between the lines of quarterly reports and spot trends before they become obvious. That pattern recognition led you to make a trade that seemed perfectly logical at the time. Now you’re staring at an SEC investigation notice, and suddenly every conversation you’ve had over the past six months feels suspect.

When Legal Trading Becomes a Federal Investigation

Understanding insider trading law feels like navigating a minefield in the dark. You can be guilty of a federal crime without ever intending to break the law, simply because you possessed information that prosecutors later determine was material and nonpublic. The gap between what you believed you knew and what the SEC or federal prosecutors argue you should have known can become the difference between walking away cleared and facing criminal charges.

The complexity deepens because insider trading cases rarely involve obvious wrongdoing. Most people facing these investigations aren’t corporate executives stealing confidential merger documents. They’re professionals who heard something at a conference, read between the lines in public filings, or made educated guesses based on years of industry experience. The question becomes: how do you prove you didn’t know information crossed the line into material and nonpublic territory?

Breaking Down Material and Nonpublic

Let’s start with what prosecutors must prove. Insider trading violations require showing that you traded securities based on material, nonpublic information in breach of a duty. Each element matters, and understanding them helps identify where your defense can take root.

Material information is anything that a reasonable investor would consider important when deciding whether to buy or sell securities. It could be financial results before they’re released, news about mergers or acquisitions, significant contracts, regulatory actions, or changes in executive leadership. The standard isn’t whether the information actually moved the stock price, but whether it reasonably could have.

Nonpublic information is exactly what it sounds like: information that hasn’t been disclosed to the general investing public. But here’s where it gets tricky. Information doesn’t become public the instant someone mentions it at a conference or includes it in an obscure regulatory filing. There’s a gray area between truly confidential information and genuinely public knowledge.

The Knowledge Defense That Actually Works

Your strongest defense often lies in demonstrating you didn’t know the information was material, nonpublic, or both. This isn’t about claiming ignorance of the law. It’s about showing you had legitimate reasons to believe the information you acted on was either publicly available or not significant enough to matter.

Common situations where knowledge defenses apply:

• Information pieced together from multiple public sources through analysis
• Details mentioned at industry conferences or in trade publications
• Information you believed was stale or already reflected in stock prices
• Tips from sources you reasonably believed had no inside access
• Trading decisions based on technical analysis or market trends rather than specific corporate information

The burden falls on prosecutors to prove you knew the information was both material and nonpublic. If you can show you had reasonable grounds to believe otherwise, you’ve created reasonable doubt.

The Mosaic Theory Defense

One powerful approach involves what’s known as the mosaic theory. This defense argues that you assembled numerous pieces of public information to reach conclusions about a company’s prospects. Like putting together a puzzle, you used publicly available data points to form a complete picture that others might have missed.

Financial analysts use mosaic theory constantly. They read SEC filings, attend earnings calls, analyze industry trends, and synthesize all this public information to make investment recommendations. The key is documenting that your trading decisions flowed from this analytical process rather than from a single confidential tip.

To successfully employ mosaic theory as a defense, you need to demonstrate what public sources you consulted, how you analyzed the information, when you formed your investment thesis, and why your conclusions were reasonable based on publicly available data.

Timing Is Everything in Building Your Defense

The timeline of your trades relative to when information became public can make or break your case. Prosecutors will scrutinize the dates carefully, looking for patterns that suggest you acted on inside information.

When You Genuinely Didn’t Know It Was Nonpublic

Sometimes information feels public because it’s being widely discussed in certain circles, even though it hasn’t been formally disclosed to the market. You might hear about a potential merger at an industry conference or notice a pattern of executive departures that suggests something brewing. From your perspective, this information seems available to anyone paying attention.

The problem is that widespread rumors aren’t the same as public disclosure. Information becomes public when it’s disseminated in a manner designed to reach investors generally, like through a press release, SEC filing, or major media coverage.

Your defense in this situation focuses on showing you reasonably believed the information was already public. Did you see references to it in financial media? Was it being discussed on investor forums? Had analysts published reports mentioning it? If you can demonstrate the information seemed publicly available from your vantage point, you establish that you lacked the required knowledge that it was nonpublic.

The Relationship Question That Determines Everything

Insider trading law doesn’t just criminalize trading on material nonpublic information. It requires that you obtained the information through a breach of fiduciary duty or similar relationship of trust. This creates another defense avenue: showing you didn’t know the person providing information was breaching any duty.

Critical questions about your information source:

1. What was your relationship with the source? A casual acquaintance carries different implications than a corporate officer or close family member.
2. Did the source owe any duty to the company? Not everyone with information about a company is an insider with fiduciary obligations.
3. What did you know about how the source obtained the information? If you believed they developed it through legitimate research, that matters.
4. Did you provide anything of value in exchange for the information? The absence of a quid pro quo supports your innocence.
5. What representations did the source make about the information? If they told you it was public or derived from public sources, that’s relevant to your state of mind.

If you received a tip but had no reason to believe the tipper was breaching any duty, you may not be liable even if the information was material and nonpublic.

Proving Your Analytical Process

Documentation becomes your best friend when facing insider trading allegations. The more you can show about your decision-making process, the easier it becomes to demonstrate your trades weren’t based on illicit information.

Pull together all the public sources you consulted: news articles, analyst reports, SEC filings, earnings transcripts, and industry publications. This establishes that you were actively analyzing publicly available information. If you kept research notes, trading journals, or sent emails explaining your reasoning, these become powerful evidence.

Steps to reconstruct your analytical process:

1. Compile your research materials: Gather every public source you reviewed before making the trade, including dates you accessed them.
2. Document your analytical framework: Explain the methodology you typically use to evaluate investment opportunities and how you applied it here.
3. Show your work: Provide any notes, spreadsheets, models, or calculations that demonstrate your thought process.
4. Establish the timeline: Create a clear chronology showing when you gathered information, when you formed conclusions, and when you executed trades.
5. Identify corroborating witnesses: Find colleagues or advisors who can testify about your analytical approach and the discussions you had about the investment.
6. Demonstrate consistency: Show that this trade fits your normal investment strategy and risk tolerance rather than representing unusual behavior.

The Sophisticated Trader Defense

Your level of market sophistication can actually help your defense. If you have a track record of successful trading, deep industry knowledge, or professional expertise in analyzing securities, it becomes more plausible that you reached correct conclusions through skill rather than through inside information.

Prosecutors sometimes assume that accurate predictions must stem from insider knowledge. But experienced traders regularly outperform the market by recognizing patterns and analyzing public information more effectively than average investors.

Evidence that supports a sophisticated trader defense:

• Documented history of profitable trades using similar analytical methods
• Professional credentials or certifications in financial analysis
• Published research or commentary demonstrating your analytical approach

When building this defense, you’re essentially showing that your track record proves you didn’t need inside information to make smart trading decisions.

What About the Small Details You Didn’t Notice?

One of the scariest aspects of insider trading investigations is that you can be held responsible for information you should have known was material and nonpublic, even if you didn’t consciously realize it at the time. The law doesn’t always require actual knowledge; reckless disregard for the truth can be enough.

This is where the “red flags” analysis comes in. Prosecutors will argue that certain circumstances should have alerted you that information was problematic. Did the source ask you to keep the information confidential? Did they seem nervous about sharing it?

Your defense needs to address why any apparent red flags weren’t actually suspicious in context. Maybe confidentiality requests are routine in your industry for competitive reasons. Perhaps the source’s demeanor was normal for them.

Building Your Defense From Day One

If you’re under investigation or concerned that your trading might draw scrutiny, your actions right now matter enormously. Don’t destroy any documents or communications. Don’t try to coordinate stories with potential witnesses. Don’t make statements to investigators without a white collar crime attorney present.

Instead, begin immediately gathering evidence that supports your defense. Collect all documents related to your research and trading decisions. Identify public sources of information you relied on. Prepare a timeline of what you knew and when you knew it.

Critical mistakes to avoid during an investigation:

1. Deleting communications or documents: This can be charged as obstruction and makes you look guilty even if you weren’t.
2. Talking to investigators without counsel: Anything you say can be used against you, and seemingly innocent explanations can become evidence of guilt.
3. Discussing the investigation with colleagues: Prosecutors may view this as witness tampering or conspiracy, even if your intentions were innocent.
4. Continuing to trade in related securities: This can complicate your defense and may be used to show consciousness of guilt.
5. Assuming cooperation will make everything go away: While cooperation can sometimes help, you need legal advice before deciding whether and how to cooperate.
6. Waiting to hire an attorney: The earlier you get legal representation, the better positioned you’ll be to protect your rights and build your defense.

Protecting Your Rights and Your Future

Facing an insider trading investigation can feel overwhelming. Federal prosecutors have vast resources, and the securities laws are stacked heavily in their favor. But you have defenses, especially if you genuinely didn’t know the information you acted on was material and nonpublic. 

The Law Offices of Richard J. Fuschino Jr. has extensive experience defending clients against federal white collar criminal charges, including complex securities violations. They can even help you gain that fresh start you’re looking for with the help of their Philadelphia expungement lawyers.

If you’re facing an SEC investigation or federal criminal charges related to securities trading, get in touch with our office for a confidential consultation to discuss your defense options and protect your rights.