“Shadow trading” occurs when someone possessing insider information about a company thereby possesses inside information about another company and trades in the shares of a similarly situated competitor.

A senior executive of a biopharmaceutical firm received confidential information about the impending takeover of his former company. Within seven minutes after receiving an email about the parties being “on track to sign the deal”, the former executive bought shares in a similarly situated biopharmaceutical company. When the merger was announced four days later that similar company’s stock price increased and the sale of the shares realised over $100 000 in profits for the defendant.

In a claim by the SEC, according to the evidence, market observers expect a “spillover effect in situations like this”. When a company makes a big announcement that causes an increase in its stock price it is typical to see a similar increase in the stock price across the industry. The defendant was found guilty of insider trading.

This is a novel case even in the US. The outcome of such a case will depend on the evidence, the company’s insider trading policy, and the law. The act of the executive in purchasing shares seven minutes after receiving the information persuaded the jury that it was not coincidence. But these cases will not be easy to prove or even necessarily pursue within South African law.