A federal jury in the Northern District of California recently found a former pharma executive liable for insider trading after he used information learned from his employer to trade in the securities of another, allegedly comparable, company. The verdict followed several pre-trial motion wins by the SEC, including a ruling by the court that the executive owed his employer a duty of confidentiality under agency law, separate and apart from any obligations imposed by written policies or express agreement. The case represents the SEC’s first successful application of the long-established misappropriation theory of insider trading to a so-called “shadow trading” fact pattern. For PE sponsors and other fund managers, the case creates potential new risks when the firm or its employees are exposed to confidential information about a current or potential portfolio company, and that information is also potentially material to the securities of another public or private company. If the firm or its employees then invest in the other company’s securities, the conduct may raise insider trading concerns under the shadow trading theory. Firms should therefore consider ways to address this new area of risk in their policies, procedures and training programs. This guest article by Sidley Austin attorneys Ranah Esmaili and Simona K. Suh explores the role the company’s written policies and confidentiality agreement played in the case; the facts the SEC relied on to show the economic link necessary to establish its shadow trading theory; and practical takeaways for how PE sponsors and other fund managers can adjust their compliance programs accordingly. For coverage of other recent SEC enforcement actions, see “SEC Enforcement Actions Targeting ‘AI Washing’ Follow Familiar ESG Playbook for Emerging Areas of Concern” (May 16, 2024); and “SEC Settles Five Additional Enforcement Proceedings for Custody Rule and Form ADV Violations” (May 2, 2024).