Is It Insider Trading If I Didn’t Sell?

Is It Insider Trading If I Didn’t Sell?

The answer is yes, and the question itself reveals a misunderstanding of what the statute prohibits. Section 10(b) of the Securities Exchange Act of 1934 does not concern itself with the direction of the trade. It concerns itself with the act of trading while in possession of material nonpublic information, and, in a separate but equally consequential provision, with the act of communicating that information to someone who does. The person who purchases shares before an acquisition announcement has violated the same rule as the person who sells them before an earnings collapse. The person who mentions the acquisition to a friend at a restaurant, who then places the trade, has violated a provision that requires no personal transaction at all.

Most people who ask this question are constructing a distinction that does not exist in the law. They learned something. They purchased securities. They did not sell. They believe that because they only bought, they are on the permissible side of a line. They are not.

The Statute Does Not Distinguish Between Buying and Selling

The operative language of Rule 10b-5, which implements Section 10(b), prohibits fraud or deceit in connection with the “purchase or sale” of any security. Both terms are operative. Purchasing a security on the basis of material nonpublic information constitutes the same violation as selling one. The SEC has brought enforcement actions against individuals whose only transaction was a purchase, and those cases have produced penalties indistinguishable from cases involving sales.

Consider the pattern the SEC encounters with the greatest frequency in merger-related enforcement: an employee learns that a publicly traded company is about to be acquired. The employee does not sell anything. The employee purchases shares, or more commonly call options, in the target company. The stock price rises on the announcement. The SEC’s data analytics tools flag the trade within days, sometimes hours. The enforcement action that follows treats the purchase as the violation, because it is one.

In the Tyler Loudon matter, the SEC brought charges in the Southern District of Texas. The defendant overheard his wife discussing an acquisition on a remote work call. He purchased shares in the target company before the public announcement. The SEC and the Department of Justice pursued both civil and criminal charges against him.

The relevant inquiry is not whether one purchased or sold. The relevant inquiry is whether one was aware of material nonpublic information at the time of the transaction, and whether a duty of trust or confidence was breached. Under the classical theory, that duty runs from a corporate insider to the corporation’s shareholders. Under the misappropriation theory, adopted by the Supreme Court in United States v. O’Hagan, the duty runs to the source of the information. Either theory treats the purchase as equivalent to the sale.

Tipping Without a Personal Trade

A less intuitive form of liability arises when the person with the information does not trade at all. Tipping, which is the disclosure of material nonpublic information to another person who then trades, creates liability for both the tipper and the tippee. The tipper need not have placed a single order. The tipper need not have profited.

The Supreme Court addressed the boundaries of tipping liability in Salman v. United States, holding that a gift of confidential information to a trading friend or relative satisfies the personal benefit element required under Dirks v. SEC. The tipper benefits, the Court reasoned, because giving information that enables a trade is the functional equivalent of trading and then giving the proceeds. The analysis does not require that money change hands between tipper and tippee. A family relationship, or even a close friendship, can supply the personal benefit.

In a 2018 enforcement action that illustrates the reach of this theory, the SEC charged an executive who tipped his brothers before an announcement of poor financial results. The brothers avoided losses. The executive did not trade. He resigned from the company after seventeen years, received a bar from serving as an officer or director, and paid a penalty exceeding half a million dollars. The absence of a personal trade provided no shelter.

This is the aspect of insider trading law that catches people who believe they have been careful. They possess information. They do not trade. They mention it, perhaps in indirect terms, to someone whose trades they cannot control. The law regards the mention as the violation, not the trade that follows it. If the recipient knew or should have known that the information was material and nonpublic, the recipient’s trades are attributed back to the source. The chain is longer than most people assume.

We see this in practice with some regularity. A client will call and describe a situation in which they shared information without understanding what they had set in motion. By the time of the call, someone else has already traded. What remains to be determined is how to respond to the investigation that is coming.

Loss Avoidance as a Theory of Liability

The statute’s penalties are calculated on “profit gained or loss avoided,” and the second term carries the full weight of the first. Selling securities to avoid a loss that would have materialized once bad news became public is treated identically to purchasing securities to capture a gain.

The Martha Stewart matter, which remains the most recognized insider trading case in public memory, involved loss avoidance. Stewart sold shares in a biopharmaceutical company the day before a negative FDA announcement, a defensive move, an attempt to preserve value rather than to create it. The SEC treated the avoidance of loss as the gain.

The civil penalty structure reinforces this point. Under 15 U.S.C. § 78u-1, the maximum civil penalty is three times the profit gained or loss avoided. The statute does not rank one above the other. A person who sells to avoid a loss of two hundred thousand dollars faces the same treble-penalty exposure as a person who purchases and realizes a gain of the same amount.

This matters for the original question because the framing of “I did not sell” sometimes conceals a different scenario. The person did not sell, but they considered it. Or they cancelled a planned sale after receiving positive nonpublic information, allowing the position to appreciate. Whether the cancellation of a pre-existing sell order constitutes a “purchase or sale” under the statute remains, in certain configurations, an open question. The University of Chicago Business Law Review has examined this in the context of Rule 10b5-1 plan terminations, noting that loss avoidance has always been deemed actionable and that the cancellation of a trade to avoid a loss is substantively indistinguishable from placing one. I am less certain about this than the preceding sentences might suggest; the case law in this area is thin, and the statutory language remains tethered to an actual purchase or sale.

The Trade You Did Not Make

There is a narrower version of the question that deserves separate treatment. It is not “I bought instead of sold.” It is “I did not trade at all. I had the information. I sat on it. Is that insider trading?”

Under current law, the answer is almost certainly no, though the certainty is less complete than one might expect. The antifraud provisions require a transaction. Section 10(b) and Rule 10b-5 prohibit fraud “in connection with the purchase or sale of any security.” Absent a purchase or sale, the jurisdictional hook is not present. The person who possesses material nonpublic information and simply holds an existing position has not, in the view of most courts and commentators, committed a securities fraud violation.

But the absence of a statutory violation does not mean the absence of consequence. Corporate insider trading policies prohibit trading during blackout periods as a standard provision, and many of those policies define “trading” to include the decision to hold. Whether a court intended this outcome or merely failed to prevent it is a question worth considering.

The Insider Trading Prohibition Act, which passed the House in 2021 as H.R. 2655, would have made it unlawful to “purchase, sell, or enter into” a security while aware of material nonpublic information. The bill did not advance through the Senate. Had it become law, the explicit statutory prohibition might have clarified the treatment of abstention. It did not, and the question remains unresolved by federal statute, addressed only by company policy and the discomfort of compliance officers who know what abstention looks like even when the law cannot reach it.

Shadow Trading and the Expanding Perimeter

In 2021, the SEC brought a case that redefined the perimeter of insider trading liability in a way that no one in corporate compliance had anticipated. The case was SEC v. Panuwat, and the theory was one that practitioners now call “shadow trading”: using material nonpublic information about one company to trade in the securities of a different company whose stock price was expected to move in response to the same news.

Matthew Panuwat served as the head of business development at Medivation, a biopharmaceutical company. He learned that Medivation was about to be acquired by Pfizer. Within minutes of receiving an email from Medivation’s CEO confirming the deal, Panuwat purchased out-of-the-money call options in Incyte Corporation, a company in the same sector that Panuwat (who, it should be noted, had worked in pharmaceuticals long enough to understand the scarcity of viable acquisition targets in his corner of the industry and the predictable effect a major deal would have on the valuations of the remaining candidates) expected to appreciate once the Medivation acquisition was announced.

The SEC argued that Panuwat had breached a duty of trust and confidence owed to Medivation by misappropriating confidential information for personal trading, even though the trade was in a different company’s securities. Medivation’s insider trading policy prohibited trading in the securities of publicly traded companies, including competitors, based on material nonpublic information obtained through employment. The district court held that this policy, combined with Panuwat’s confidentiality agreement and traditional agency law principles, established the duty.

A jury found Panuwat liable in April 2024. The court imposed the maximum civil penalty and an injunction against future violations. Panuwat’s motion for a new trial was denied that September.

The implications are considerable, and, in certain respects, unsettling. Before Panuwat, the conventional understanding was that insider trading liability attached to trades in the securities of the company to which the information related, or the company whose insiders had tipped the information. Shadow trading extends this to trades in any company with a sufficient “market connection” to the company that was the subject of the information. The SEC need only demonstrate that the nonpublic information was material to the securities that were actually traded, and that the trader breached a duty of trust or confidence in using the information.

A survey conducted by White & Case of insider trading policies filed by fifty public companies found that only eighteen percent specifically prohibit shadow trading. The remainder have not yet absorbed the implications of Panuwat. This is, to be direct about it, a gap that will produce additional enforcement actions before it is closed.

The Ninth Circuit is expected to review the case. Whether the appellate court upholds the theory or narrows it will determine whether shadow trading becomes a permanent feature of the enforcement regime or an artifact of one trial court’s reasoning.

What the SEC Examines in Practice

The SEC’s Market Abuse Unit maintains a data analytics program that monitors trading patterns around material events. The surveillance is not occasional. It is continuous, and it is more granular than most people realize. The SEC’s ATLAS tool integrates multiple streams of data, including blue sheet trading records, pricing data, and public announcements, to identify statistical anomalies in trading ahead of significant corporate events.

An investigation typically begins with one of three triggers: market surveillance identifies unusual trading volume or timing; a whistleblower provides information under Section 21F of the Securities Exchange Act; or a routine review of Form 4 filings reveals a suspicious pattern.

Once an investigation is opened, the SEC examines several factors that practitioners in this area learn to anticipate. The proximity of the trade to the announcement is the first consideration. A purchase of call options two days before a merger announcement attracts more scrutiny than a purchase six months prior, though both may be examined. The size of the position relative to the trader’s net worth is the second. Someone who commits the majority of their liquid assets to a single stock purchase immediately before a positive announcement has constructed a set of facts that is, to put it plainly, difficult to explain as coincidence.

The SEC also examines the trader’s relationship to persons who possessed the information. Communications records, phone logs, text messages, and email metadata are subpoenaed as a matter of course. In several recent cases, the SEC identified the connection between tipper and tippee through communication patterns.

Our approach to representing clients in these investigations differs from what most firms recommend at the outset. The standard advice is to cooperate early and cooperate fully. We have observed that cooperation, when it begins before the client has a complete understanding of what the SEC already knows, can narrow the client’s options in ways that are not immediately apparent. We prefer to conduct our own internal review first, using the same categories the SEC uses to evaluate its case, before the client engages with the government. The factual picture becomes clearer, the client’s position becomes more defined, and the conversation with the SEC, when it occurs, proceeds from a position that reflects preparation rather than reaction. In something like three out of every four matters we have handled this way, the outcome was more favorable than it would have been under the standard approach.

The Perimeter Continues to Move

The law of insider trading in the United States was not enacted by Congress as a comprehensive code. It was constructed, across decades, by the SEC through rulemaking and by the courts through litigation. No federal statute defines “insider trading.” Section 10(b) prohibits the use of “manipulative or deceptive devices” in connection with the purchase or sale of securities. Rule 10b-5, adopted by the SEC in 1942, provides the operational framework. Everything else, every theory of liability, every extension of the duty, every boundary of the offense, has been supplied by case law.

This means the perimeter is always moving. The classical theory gave way to the misappropriation theory. The misappropriation theory gave way to shadow trading. The personal benefit test was broadened by Salman, which held, as noted above, that even a gift of information to a relative suffices. Rule 10b5-1 plans, once regarded as a reliable safe harbor, were tightened by the SEC in 2022 after evidence that insiders were using them to time trades around material information.

The question is never whether one bought or sold. What matters is whether one possessed information that the market did not, and whether the act of trading, in whatever direction, breached a duty that the law or a contractual obligation imposed.

If you are examining a transaction or a communication that may involve material nonpublic information, the time to assess exposure is before the SEC contacts you, not after. A consultation is the beginning of that assessment, and it costs nothing.