Catholic University Law Review


Insider trading is a term of art referencing the fraudulent practice of trading securities in a company on the basis of material, nonpublic information about that same company in breach of some duty owed to another. The practice erodes the public’s trust in the integrity of our capital markets for a reason that is rather intuitive: it is inherently unfair to allow an individual to make a quick and certain profit by exploiting material, nonpublic information to which he privy due solely to his position in a company or some other relationship of trust and confidence. In this context, unrelenting civil enforcement by the Securities and Exchange Commission (“SEC”) is surely warranted. But, what if an individual in possession of material, nonpublic information about one company trades in the securities of a different company? Is a civil enforcement action warranted in this context? This question is derived from the novel “shadow trading” theory of insider trading liability proffered by the SEC in its August 2021 civil enforcement action against Matthew Panuwat.

Judicial endorsement of the SEC’s shadow trading theory presents concerning doctrinal and practical implications. First, it upends the traditional materiality inquiry required in an insider trading action. Second, it transforms Rule 10b-5—the SEC’s primary enforcement mechanism—into a rule without limitation. Third, it will increase the cost of executing securities transactions as investors in possession of material, nonpublic information about one company could be required to abstain from trading in an endless list of companies, industries, and investment vehicles. Taken together, these considerations compel the rejection of the SEC’s shadow trading theory of insider trading liability.