Expert Networks and the Mosaic Theory

A hedge fund analyst covering semiconductor stocks wants to understand yield problems at a chip fabricator better than the public research does. An expert network firm can connect them, for a fee, with a former engineer at that exact company who can explain how fabrication yield issues typically play out. This is a legitimate, widely used research tool — expert networks operate openly and are used by essentially every large fund. The problem is that the same channel that connects an analyst to a genuinely useful industry expert can also connect them to a current employee willing to describe next quarter's unreleased earnings, and several well-publicized insider trading cases in the 2010s were built exactly on expert-network calls that crossed that line.

The legal test for what an analyst is allowed to build a thesis from is often called the mosaic theory: it's permissible to combine many small, individually immaterial pieces of information — public filings, industry chatter, a supplier's comment about order volumes, a survey of retail traffic — into a differentiated, non-public conclusion, as long as no single piece you relied on was itself material non-public information handed to you directly. The mosaic can legally include a lot of things the average investor doesn't know; it cannot legally include one specific fact — like an unreleased number — obtained from someone with a duty to keep it confidential.

In practice, funds using expert networks impose strict rules: compliance pre-clears which experts can be booked (barring anyone still employed by, or a board member of, a company likely to discuss confidential information about it), calls are often recorded, and analysts are trained to redirect a conversation immediately if an expert starts describing something that sounds like unreleased financial results.