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OPINION UPFRONT Shadow insider trading in the light As regulators adapt to digital asset trading, new and old issues arise Neill May is a partner at Goodmans LLP in Toronto, focusing on securities law, emphasizing M&A and corporate finance. The opinions expressed in this article are his alone. the two companies were in a small group of closely comparable companies in a space with substantial acquisitive interest, and the traded stock would have been expected to rise on disclosure of the proposed acquisition. Insider trading issues raise three core questions for regulators, publicly traded issuers, and market participants. First, certainly, is whether the legal frame- work captures the relevant activity – and if not, whether it should. Even putting aside vexing questions about crypto assets, shadow trading creates obvious challenges, including defining the degree and nature of the correlation between two issuers. The second question, a feature of Canadian secu- rities law, is whether the trading activity that is not illegal nevertheless warrants regulatory enforcement under the securities commission's powers to make orders in the public interest. This power has been used to address gaps occurring where activity resembling archetypal insider trading did not trip the technical prohibition (for juris- dictional or other reasons). The third ques- tion is whether this should be addressed in issuers' trading policies. These policies serve various purposes, including protecting the reputation and interests of the issuers them- selves. Published regulatory best practices provide for these policies, and regulators have initiated enforcement against individ- uals for violating those policies. In Panuwat itself, the issuer had a policy that prohibited trading based on non-public information in securities of the issuer itself or other publicly traded companies, which may be a key hook in that case. Are issuers better protected by proscribing that activity, or does a broad net create potential problems for the issuer? These are all topical and good questions, though caution is still indicated. Discussing these on long family car rides has ironically motivated my family members, for reasons I only now understand, to recommend that I consider removing my seatbelt. WHEN WE learned about insider trading in law school, the threshold question – unsurprising, given the Socratic environment – was whether insider trading should be regulated at all. At the time, the arguments against regulation seemed to focus on one debatable contention: that insiders freely trading on non-public information would improve market efficiency through the signalling in their trading, disregarding all other considerations. There is no perfect analogy, but this seemed like arguing against seatbelt requirements because the consequences to those eschewing seatbelts would, on balance, tend to remove less-careful people from an overpopulated world. Insider trading continues to be a fruitful subject for discussion and regulatory evolu- tion. Earlier this summer, the US Department of Justice laid the first-ever insider trading charges concerning digital assets, charging a project manager at an online trading platform with insider trading of non-fungible tokens (NFTs). The charge was laid on the basis that the individual traded in tokens that he knew would soon appear on his employer's plat- form's main web page, which had tended to result in increased valuations for other assets. More recently, three people were charged in the first-ever cryptocurrency insider trading scheme in the US. A former employee of Coinbase (a large cryptocurrency exchange) directly involved in the asset-listing team (responsible for listing crypto assets on Coinbase's exchanges), as well as his brother and another associate, were charged with buying crypto assets before the public announcement of the intention to list them. As insider trading rules and regulators adapt to new instruments and technolo- gies, classic issues, too, continue to arise, like "shadow insider trading." Taking a step back, insider trading is, in its (simplified) archetypal form, trading in secu- rities of an issuer while possessing material, non-public information about that issuer. A perennial law-school question has turned on the concept that publicly traded issuers don't operate in a vacuum. If a party with access to non-public information about an issuer trades in securities of another issuer whose financial fortunes happen to be correlated with those of the first issuer, is that offside? A federal district court in the United States (where the regulatory framework concerning insider trading is in form different from that of Canada) denied a motion in SEC v. Panuwat to dismiss a complaint for insider trading. In that case, an executive at an oncology-focused biopharmaceutical company traded in securi- ties of a competitor while aware of an undis- closed pending acquisition of the company. The SEC alleged that the information was material concerning the traded stock because "Insider trading continues to be a fruitful subject for discussion and regulatory evolution" www.canadianlawyermag.com 15