“Shadow” Insider Trading – SEC Wins Jury Trial in Closely Watched Insider Trading Case – Shartsis Friese LLP

It seems certain that the Court’s rulings upholding the SEC’s legal theory, and the jury’s validation of the SEC’s circumstantial case, will embolden the SEC to continue bringing shadow trading cases. Traders therefore need to consider shadow trading in their compliance programs. One of the main challenges shadow trading will present for market participants is the sometimes difficult assessment of materiality. At what point does information “about” one company become material to a different company? If one has MNPI about one company, does that mean they have material nonpublic information about all the companies in the same sector? ….

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The jury verdict may not be the final word in this case. Mr. Panuwat may appeal the outcome and bring the question of the SEC’s legal theory before the Ninth Circuit. If so, the odds are that the Ninth Circuit upholds the trial court’s legal conclusions and also views shadow trading as within established law. In any case, the jury’s verdict means that shadow trading is now more firmly established as a type of insider trading – it is no longer “novel” and the SEC will continue to bring shadow trading cases. Investment advisers should assume that SEC examiners will want to see compliance policies and procedures aimed specifically at preventing shadow trading. More broadly, all market participants need to take note of this case to ensure they understand that shadow trading is a form of insider trading.

Source: “Shadow” Insider Trading – SEC Wins Jury Trial in Closely Watched Insider Trading Case – Shartsis Friese LLP