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." This is different than directly knowing MNPI about the other company when you trade its securities, which is also insider 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.

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. On January 14, 2022, the United States District Court for the Northern District of California issued a decision in SEC v. Matthew Panuwat that allowed the case to proceed, validating the SEC’s use of its legal theory (see alerts from Clearly Gottlieb and Davis Polk).

Investigative reporting from Pro Publica (Wealthy Executives Make Millions Trading Competitors' Stock With Remarkable Timing) offers a warning about purchases and sales of stock in direct competitors and partners, which both government investigators and the news media are now focusing on.