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Shadow Trading

Buying or selling the securities of one company (e.g. a client or vendor) while in possession of material nonpublic information of another company (e.g. your employer) that is closely related or economically linked to that company. The SEC considers "shadow trading" to be a type of insider trading, though whether courts will agree remains to be seen.

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 and its implications, see an alert from the law firm Akin Gump and a commentary from the NASPP.

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