Chapter 2:

Insider Trading: Focus on Subtle and Complex Issues -

Many hedge funds routinely face insider trading concerns as they trade equity or debt. Sometimes these issues are fairly obvious, such as where the fund has learned material, non-public information, or MNPI, directly from the company. Perhaps the company solicited the fund as an investor in a new equity offering and brought the fund “over the wall,” meaning that the information is embargoed until the offering is public. However, in many cases, insider trading issues are more subtle and complex. Assume, for example, that a fund learns from one of its consultants that companies that produce solar panels are having a down quarter due to developments and trends that logically should impact sales of other renewable energy products. Can the fund short the common stock of a portfolio company that produces the blades for wind mills that generate electricity?

In this chapter, we summarize the law that applies to insider-trading issues, including the practical impact, if any, of the relatively recent and widely publicized Supreme Court and Second Circuit decisions. We then trace through a factual scenario to focus on more complex issues...