When It Comes To Insider Trading, You’ve Probably Been Looking For Materiality In All The Wrong Places

It must also be “material.” And, to make a long Levine post short, since Nest Labs has no relationship to NEST, information about Nest Labs cannot be material to NEST. That seems rather straight forward and smart. But it’s wrong. Here’s how the judge instructed the jury in the recent case against Mark Cuban: “Materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information. Materiality is not judged in the abstract, but in light of the surrounding circumstances. Information is material if there is a substantial likelihood that, under all the circumstances, the information would have assumed actual significance in the deliberations of the reasonable shareholder.” So here’s something both the federal courts and the SEC consider to be an important factor when considering materiality: The effect on the stock’s price. As the Third Circuit put it in Oran v. Stafford, “when a stock is traded in an efficient market, the materiality of disclosed information may be measured post hoc by looking to the movement, in the period immediately following disclosure, of the price of the firm’s stock.” The price of NEST shares rose 1,900 percent when the deal was disclosed.
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