Critical to the question of insider trading is whether the information in the possession of the trader is non-public and material. To be public the information need not be the subject of a press release or an SEC filing. It is sufficient, for example, if it is already known among analysts that follow the company. To be material the information must be such that it would alter the total mix of information available. The extent to which a piece of information alters that mix may, for example, be a function of its reliability. The question of what constitutes material non-public information was central to the appeal of Johesph Contorinis on conspiracy and insider trading charges. U.S. v. Contorinis, Docket No. 11-3-cr (2nd Cir. Decided Aug. 17, 2012).

Mr. Contorinis was employed as a co-portfolio manager of the Jeffries Paragon Fund which invested in the retail and personal product sectors. As a co-portfolio manager Mr. Contorinis, along with another, was responsible for investment decisions but not the disbursement of profits.

In 2000 Mr. Contorinis became friends with Nicos Stephanou who became an investment banker, employed in the mergers and acquisitions group at UBS. The two men spoke frequently on the phone, sometimes as much as 75 times per month. Mr. Stephanou regularly shared confidential information with his friends.

On September 2, 2005 Albertsons grocery store chain announced that it was exploring options to increase shareholder value, including a possible merger. Mr. Contorinis purchased a large block of Albertson shares that day for the Fund. He also spoke that day to Mr. Stephanou who was assigned to the team working on the deal. Between the time of the announcement by Albertson and January 2006 when the sale of the grocery chain was actually announced, the prospects for the deal frequently changed. At times it appeared to be moving forward. At others it did not.

Mr. Stephanou kept his friend abreast of these events. As the news changed, Mr. Contorinis at times, but not always, altered the position held by the Fund in Albertson shares. For example, on November 22 Mr. Stephanou learned that it was more likely than not that the deal would proceed. He told his friend who purchased 250,000 shares of Albertson’s the same day. In contrast, on December 6 Mr. Stephanou learned that the likelihood of the deal had drastically diminished. Mr. Contorinis, however, purchased more shares.

Following the deal announcement the Fund sold all of its holdings in Albertson stock, yielding a profit of about $3 million. Mr. Contorinis testified that throughout he kept his friend informed about the status of the deal, a fact Mr. Stephanou denied in his testimony. A jury found Mr. Stephanous guilty.

Central to Mr. Stephanou’s appeal was his challenge to the definition of what constitutes material non-public information in the jury instructions. That instruction informed the jury that information is generally not public if it is not available in press releases, SEC filings and other public reports. Such availability is not dispositive of the question, according to the instruction, because “sometimes a corporation is willing to make information available to securities analysts, prospective investors, or members of the press . . . On the other hand, the confirmation by an insider of unconfirmed facts or rumors – even if reported in the newspaper – may itself be inside information . . . ‘material’ information is information which a reasonable investor would have considered significant in deciding whether to buy, sell, or hold securities . . . “

Mr. Contorinis argued that the instruction contained a critical omission because it failed to state that the general confirmation of an event that is “fairly obvious” to knowledgeable investors is not material, nonpublic information. He also objected to the court’s statement that the confirmation by an insider of unconfirmed facts or rumors may be inside information. The Second Circuit rejected both claims.

While the concepts of materiality and nonpublic status refer to different things, they also overlap. “The content of a piece of information may be of importance in affecting the share price but so well-known that it does not alter the mix of available information and is therefore not deemed to be material. Conversely, the same information, if previously unknown to the public, may alter substantially the mix of information and thus be deemed very material.”

The reliability of the information may also affect its materiality. Thus a tip that provides additional reliability to existing information may be material the Court noted. Viewed in this context, the trier of fact could find that a statement from an insider that confirms a widely circulating rumor is material.

These concepts are reflected in the district court’s instructions. In contrast, Mr. Contorinis’ arguments focus entirely on the content of the reports or tips to the exclusion of their reliability. That, the Court concluded, “misstated the law.” The verdict was affirmed.