The question of whether and when a party can trade in securities when subject to an NDA is one that market participants frequently face. Recently, in United States Chow, 993 F.3d 125 (2d Cir. 2021), the Second Circuit offered important guidance on this topic when it affirmed the insider trading conviction of the managing director of an investment firm that was seeking to acquire a publicly traded company. The defendant’s firm and public company had entered into a nondisclosure agreement (“NDA”) requiring the firm to use any material nonpublic information (“MNPI”) obtained from the potential target solely for purposes of evaluating a potential acquisition. In violation of that restriction, the defendant disclosed MNPI to a business associate, who traded in the company’s securities and realized a $5 million profit.

Although Chow addressed several insider trading and other issues, this client alert addresses the one aspect of the decision that has particular practical implications for market participants. Specifically, the court held that an NDA merely requiring a party to keep information confidential—even if the NDA does not have an express trading prohibition—is sufficient to create a relationship of trust and confidence, a necessary element of an insider trading charge. In reaching that conclusion, the Second Circuit reaffirmed its prior holdings on this subject, but made the point even clearer. [1]

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