On August 17, 2021, the U.S. Securities and Exchange Commission (SEC) filed a litigated complaint against a former employee of a biopharmaceutical company for trading in a peer company’s stock in advance of an announced acquisition of his employer. The SEC’s complaint alleges that — minutes after learning that his company would be imminently acquired and days before the news was publicly announced — the employee purchased short-term, out-of-the-money stock options of the peer company (sometimes referred to as an “economically-linked” company) whose value he anticipated would materially increase upon the announcement. The SEC alleges that the employee traded based on material non-public information (MNPI) he learned in the course of his employment and in breach of a duty of confidentiality to his employer.
This action serves as a reminder that the SEC is willing to apply theories of insider trading and the element of materiality to novel fact patterns. Here, that means bringing charges where an insider trades in securities of a company that is neither the entity to which the duty of trust and confidence was owed, nor a company potentially involved with that entity (such as a merger target), but a company that is somehow economically linked, such as a peer or competitor company. This article suggests steps for companies and fund managers to consider in the wake of this recent enforcement action, including reviewing policies and procedures and conducting updated employee training to address risks associated with trading securities of economically-linked companies.
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