The classic insider-trading case is using material nonpublic information (MNPI) about the company that you work for to decide to trade that company's stock. However, using MNPI that you learned on the job to buy stock in another company is also insider trading under what is known as the "misappropriation theory." Most corporate insider trading policies prohibited employees from profiting from material nonpublic information learned at work by trading in their company’ stock or in the securities of another publicly traded company.

The US Supreme Court has long supported this interpretation of the securities laws in stating that you commit securities fraud when you "misappropriate confidential information for securities-trading purposes, in breach of a duty owed to the source of that information." As an employee, you are entrusted with access to confidential information; misusing that information is a breach of that trust. Under this insider-trading definition, the information you learn by working at your company belongs exclusively to your employer, and you may not use it for personal advantage.

Shadow Trading

If you learn material nonpublic information about your company which you believe will also impact the stock price of another company (e.g. a client, vendor, or competitor), and then trade in the other company’s stock, that is considered by the SEC to be a type of insider trading called "shadow trading."

In August 2021, the SEC filed a complaint (SEC v. Panuwat) in a California federal court that tests this legal theory. The SEC claims that the defendant misappropriated confidential information about his employer, Medivation, when he learned that the company was an acquisition target of Pfizer. Rather than buying his company's stock, the defendant purchased short-term options in a competitor company "whose value he anticipated would materially increase when the Medivation acquisition announcement became public," the SEC alleges.

The SEC believes that the defendant knew the purchase of any of the smaller oncology-focused biopharmaceutical companies with commercial-stage drugs would make the remaining companies potentially more valuable. The stock of that competitor did increase by 8% after the acquisition's announcement. The outcome of the case remains to be decided by the court.

For details and insights on the SEC's case and its implications, see alerts from the law firms Akin Gump, Troutman Pepper, and Wachtell Lipton Rosen & Katz, along with a commentary from the NASPP.