The legal concept of shadow selling is a novel, undocumented unusual event that corporate insiders can use to circumvent insider trading regulations and SEC scrutiny. The U.S. Securities and Exchange brought a complaint against a biopharmaceutical executive in the case SEC v. Panuwat, which alleges insider trading even though the defendant did not trade in shares of his employer. The SEC had never brought a case before based on shadow trading.
In 2015, Mihir N. Mehta of MIT Sloan & Temple University, David M. Reeb* of National University of Singapore and Wanli Zhao of Southern Illinois University published a paper titled "Shadow Trading:Do Insiders Exploit Private Information About Stakeholders?"
Their paper suggested that "target firms," are those competing firms with a correlation to competitors. These target firms "experience a 12% to 17% change in symptoms of informed trading activity prior to the release of private information by a business phttps://www.ft.com/content/b91eb144-0696-4f1b-b09f-604bc8aeef5a| The authors suggest five reasons why shadow trading arose more readily when source firms:
- "Have no explicit policy restricting shadow trading by their employees"
- "Experience regulatory shocks to own firm insider trading"
- Encounter exogenous employee mobility shocks"
- Internally promote their CEOs"
- f=Face the sudden deathof the CEO and promote internally.
The authors informally estimated each typical shadow trading event they studied generated profits of up to $678,000.
- New “Shadow Insider Trading” SEC Enforcement Action -- Four Lessons for Private Fund Managers. Akin Gump.
- SEC Charges Novel Insider Trading Case and Shines a Spotlight on ‘Shadow Trading’. Schulte Roth & Zabel.
- SEC accuses pharma exec of 'shadow trading'. Reuters.
- SEC v. Panuwat. U.S. Securities and Exchange Commission.
- Blog: Is this insider trading?. JD Supra.
- SEC aims to stop insiders dumping stock before the bad news hits. Financial Times.
- Shadow Trading:Do Insiders Exploit Private Information About Stakeholders?. DavidReeb.net.