Article

Nondisclosure Agreements and Insider Trading Risk

ABA Commercial & Business Litigation

28 Mar 2022

Ronald White authored an article for the American Bar Association's Commercial & Business Litigation Committee newsletter discussing United States v. Kosinski and United States v. Chow, where the court ruled that a party's trading in violation of a nondisclosure agreement (NDA) requiring it to keep corporate information confidential can constitute insider trading.

"In Kosinski and Chow, the Second Circuit appears to have established a bright-line rule that entering into an NDA or otherwise agreeing to keep a corporation’s information confidential by itself gives rise to the fiduciary duty or duty of 'trust and confidence' that can trigger insider trading liability," Ronald wrote. "The potentially distinguishing factors cited in those cases—in Kosinski’s case, that his NDA did not contain an express prohibition on his use of the confidential information, and in Chow’s case, that his posture as potentially adverse to the company in negotiations was not one typically thought to give rise to a fiduciary relationship—were dismissed by the Second Circuit as distinctions without a difference. Because none of the other federal appellate courts appear to have addressed this issue directly, and given the Second Circuit’s traditional prominence in the field of securities law, these decisions may have significant persuasive effect, even outside the Second Circuit."

He added: "Whether or not the Second Circuit’s rulings on this issue are ultimately approved by the Supreme Court or adopted by other courts, they have attempted to set clear boundaries for market participants to follow (the need for which is a common theme of insider trading jurisprudence): an agreement to maintain the confidentiality of corporate information creates a duty of trust and confidence such that the use of the information to trade constitutes insider trading. This bright-line rule applies even in the absence of an agreement not to use the information, and it applies even to individuals who, in other contexts, would not be considered fiduciaries of the company."

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