Clifford Chance

Shadow Trading – The SEC's Novel Theory of Insider Trading to Be Tested

August 27, 2021

On August 17, 2021, the United States Securities and Exchange Commission filed a first of its kind insider trading complaint in California federal court, alleging that a former pharmaceutical company executive violated federal securities laws by using inside knowledge that his own company was being acquired, to trade profitably in the securities of a competing company. The complaint suggests that the SEC may attempt to expand the scope of insider trading liability to include a theory a recent academic paper dubbed "shadow trading": where corporate insiders exploit material nonpublic information about their firm, to trade in the securities of an "economically-linked" firm, such as a similarly situated competitor. Such a push from the SEC would almost surely invite serious challenge from accused defendants, and may prompt employers to consider adjustments to their own internal policies to constrain the risk of employee liability under such a theory.

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