The SEC prevailed on a motion to dismiss a closely watched lawsuit alleging that a company employee had engaged in insider trading based on news about a not-yet-public corporate acquisition when he purchased securities of a third-party company that was not involved in the deal. The January 14, 2022 decision in SEC v. Panuwat (N.D. Cal.) marks the first time a court has considered the theory of “shadow trading,” which involves trading the securities of a public company that is not the direct subject of the material, nonpublic information (“MNPI”) at issue.

The Panuwat ruling does not appear to break new ground under the misappropriation theory of insider trading under the particular facts alleged. But the “shadow trading” theory warrants attention because it can have wide-ranging ramifications for traders, including hedge funds.

The “shadow trading” theory raises some complex materiality issues that do not arise in the more traditional factual context where the issuer whose securities are traded is itself the direct subject of the MNPI. Where, as here, the issuer whose securities were traded (Company B) is not the direct subject of the MNPI (Company A), factual questions arise about how similar the two companies are and how many other companies could be deemed comparable to Company A.

As we noted in our earlier report on this case, companies and traders, including private funds, should consider whether insider-trading policies and procedures, as well as any relevant nondisclosure agreements, cover securities of third-party companies. The language and breadth of those policies could be determinative – and could influence any trading restrictions or “walls” that companies implement.

Read the full post on Proskauer’s Corporate Defense and Disputes blog.

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Photo of Joshua M. Newville Joshua M. Newville

Joshua M. Newville is a partner in the Litigation Department and a member of Proskauer’s White Collar Defense & Investigations Group and the Asset Management Litigation team.

Josh handles securities litigation, enforcement and regulatory matters, representing corporations and senior executives in civil and…

Joshua M. Newville is a partner in the Litigation Department and a member of Proskauer’s White Collar Defense & Investigations Group and the Asset Management Litigation team.

Josh handles securities litigation, enforcement and regulatory matters, representing corporations and senior executives in civil and criminal investigations. In addition, Josh advises registered investment advisers and private fund managers on regulatory compliance, SEC exams, MNPI/insider trading and related risks.

Before joining Proskauer, Josh was senior counsel in the U.S. Securities and Exchange Commission’s Division of Enforcement, where he investigated and prosecuted violations of the federal securities laws. Josh served in the Enforcement Division’s Asset Management Unit, a specialized unit focusing on investment advisers and the asset management industry. His prior experience with the SEC provides a unique perspective to help asset managers manage risk and handle regulatory issues.

Photo of Christopher Wells Christopher Wells

Chris heads Proskauer’s Hedge Fund Group and has been a leading lawyer in the hedge fund industry for more than 30 years. During that time, he has assisted on hundreds of hedge fund launches, counselling and assisting hedge fund managers as they grew…

Chris heads Proskauer’s Hedge Fund Group and has been a leading lawyer in the hedge fund industry for more than 30 years. During that time, he has assisted on hundreds of hedge fund launches, counselling and assisting hedge fund managers as they grew from often very modest beginnings to become some of the world’s largest and best known hedge funds.

He advises fund managers and investors on all aspects of the hedge fund business, including fund structuring and formation, seed investments, asset manager M&A transactions, agreements among principals, employment and compensation issues, and regulatory and enforcement matters.

Chris’s long and deep experience in the hedge fund industry gives him a unique ability to counsel clients dealing with some of the most challenging situations that fund managers can encounter, including complex fund restructurings, evolving hedge fund investment terms, hybrid and alternative fund structures, liquidity challenges and constraints, internal disputes, and complex enforcement matters.

Photo of Julia Alonzo Julia Alonzo

Julia Alonzo is the Litigation Department Legal Director and Head of Women’s Initiatives.  As Legal Director of the Litigation Department, she works closely with the department’s co-chairs to manage its business, operations, and achievement of strategic goals.  In her capacity as Proskauer’s Head…

Julia Alonzo is the Litigation Department Legal Director and Head of Women’s Initiatives.  As Legal Director of the Litigation Department, she works closely with the department’s co-chairs to manage its business, operations, and achievement of strategic goals.  In her capacity as Proskauer’s Head of Women’s Initiatives, Julia focuses on executing the firm’s commitment to advancing and supporting women attorneys at all stages of their careers.  In particular, she manages the firm’s Women’s Sponsorship Program and the Proskauer Women’s Alliance.

Julia also serves on the Firm’s Hiring Committee and Summer Program Committee.

Previously, Julia was a senior counsel at Proskauer in the Litigation Department, with a focus on securities and corporate governance litigation.