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Shadow Trading

Buying or selling securities of a company when you know material nonpublic information (MNPI) about your own company that you believe will affect the stock price of that other businesss (e.g. a client, vendor, or competitor). The SEC considers "shadow trading" to be a type of insider 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 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, its implications, and current status, see the related FAQ elsewhere on this website.

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