The SEC is attempting to broaden the scope of liability under federal insider trading laws, and it just secured its first incremental victory along the way.
The win comes as a newly formulated legal theory offered by the SEC survived a motion to dismiss in SEC v. Panuwat, a case proceeding in the U.S. District Court for the Northern District of California. The SEC’s legal theory states that the practice of “shadow trading” constitutes a violation of federal securities law, namely Section 10(b) of the Exchange Act and Rule 10b-5.
“Shadow trading” occurs when a person with a connection to one publicly held company uses material, nonpublic information (MNPI) they have gained from their connection with that company to inform their trading decisions in a separate publicly held company. Typically, this separate company is economically connected in some way to the company for which the person possesses MNPI.