Shadow Trading Part Deux: SEC Doubles Down on Shadow Trading Theory

The Securities and Exchange Commission (SEC) has made significant strides in its enforcement efforts against insider trading, particularly in the realm of “shadow trading.” This theory poses the fact that individuals can violate insider trading laws by using material, nonpublic information (MNPI) from one company to trade in the securities of another, related company. 

Key Cases

• SEC v. Panuwat¹: (April 5, 2024) A jury found Matthew Panuwat guilty of insider trading for using information about his employer’s acquisition to trade in a related company’s stock. This marked a significant victory for the SEC, as it was the first successful prosecution under the shadow trading theory. 

• SEC v. Bechtolsheim: (May 30, 2024) The SEC also secured a settled judgment against Andreas Bechtolsheim, the former chairman of Arista Networks, for allegedly using insider information to trade in a related company’s stock. While Bechtolsheim did not admit or deny the allegations, the settlement included a civil penalty and a ban from serving as an officer or director of a public company. 

Implications of These Cases

The SEC’s success in these cases has several important implications: 

1. Expands the Definition of Insider Trading: The SEC’s victories could lead to a broader interpretation of insider trading laws, potentially expanding the scope of liability for individuals who misuse confidential information. 

2. Increases Regulatory Scrutiny: These cases demonstrate the SEC’s commitment to combating insider trading and protecting investors. Companies and individuals can expect increased regulatory scrutiny and enforcement actions in the future. 

3. Enhances the Need for Compliance Measures: To mitigate risks and avoid legal issues, companies must carefully review and update their insider trading policies and procedures. This includes:  
   • Comprehensive Training: Providing thorough training to employees on the importance of confidentiality and the potential consequences of insider trading. 
   • Clear Guidelines: Establishing clear guidelines for trading activities, including blackout periods and pre-clearance requirements.
   • Monitoring and Surveillance: Implementing effective monitoring and surveillance systems to detect potential violations. 

Future Outlook

As the regulatory landscape continues to evolve, it is essential for companies and individuals to stay informed about the latest developments and take proactive measures to mitigate risks. The SEC is likely to continue its efforts to combat insider trading, including further enforcement actions under the shadow trading theory. 

Conclusion 

The SEC’s victories in these cases demonstrate its commitment to protecting investors and maintaining the integrity of the securities markets. By understanding the implications of the shadow trading theory and taking proactive steps to comply with regulatory requirements, companies and individuals can help to prevent insider trading and mitigate related risks. 

This is an opportune time for market participants to take stock of their insider trading, restricted lists and information barrier policies, procedures and controls. Star is here to help firms monitor employees and firm trading for all types of insider trading, including Shadow Trading.  You can learn more about it here.

Steve Brown

As Head of Business Development, Steve Brown is responsible for helping drive growth at Star, with a focus on go-to-market planning, data and vendor partnerships, channel sales, new markets, and mergers and acquisitions. Steve joined Star in April 2021, and brings with him 25 years of experience advising financial firms on regulatory compliance. Prior to joining Star, Steve was Director of Broker-Dealer Client Services at Compliance Risk Concepts LLC, a senior director at PwC, and Head of Fixed Income and Capital Markets Compliance at U.S. Bancorp Investments, Inc. Steve began his career at Wachovia, where he was Head of Global Investment Banking Compliance and Control Group, and is considered a pioneer in the control room space—having established the bank’s first formal control room function.

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