Classically, insider trading occurs when a corporate insider commits securities fraud by trading in the securities of their own company on the basis of material nonpublic information (MNPI). In 2000, the US Securities and Exchange Commission (SEC) codified in Rule 10b5-1 a second form of insider trading — the misappropriation theory — which targets trading in the securities of a potential acquiror or merger partner. Rule 10b5-1 prohibits directors, corporate insiders, and anyone who has obtained MNPI from buying or selling a security in breach of a duty owed to the source of the information. Shadow trading is an expansion of the misappropriation theory of insider trading. It involves buying or selling securities of one company while in possession of MNPI about an “economically-linked” company.
