The SEC’s enforcement results for fiscal year 2026, released earlier this week, show that SEC enforcement activity fell sharply in fiscal 2026, reaching its lowest level in years (the federal government’s fiscal year ends on September 30). However, insider trading enforcement actions did not follow that trend: fiscal 2026 saw an increase in the number of insider trading cases brought, with 38, compared to 36 in fiscal 2025. Of the fiscal 2026 insider trading cases, fully 42% (16 of 38) involved trading in the securities of biopharmaceutical companies—a remarkable proportion of cases for one industry segment. These numbers are consistent with a trend we have seen for more than five years: an increasing focus on biotech trading in insider trading investigations. For private fund advisers, almost all of the insider trading inquiries we have handled over the past few years have involved trading in biotech companies.
The reason for the SEC’s focus is that biotech companies can have a larger material nonpublic information (MNPI) footprint and, especially for smaller development-stage companies, the information can be particularly material, causing massive stock price swings when publicly disclosed. For example, information about binary events such as top-line clinical trial results, FDA feedback, FDA approvals, and drug development milestones is often known to a broad group of people before public disclosure and can cause outsized stock price moves when disclosed. Clinical-stage companies also often need to raise money through follow-on offerings, registered direct offerings, and private investments in public equity (PIPEs), and often do so following or in conjunction with the public disclosure of positive trial data. The fact of those offerings, which are confidential until the consummated offering is publicly announced, is itself material nonpublic information because the offerings are dilutive and usually cause the stock price to drop. To line up buyers for the confidential offerings, issuers and their placement agents “wall cross” institutional investors to disclose the identity of the issuer conducting the offering and sometimes the not-yet-released trial results or other confidential data. With so many varieties of material nonpublic information in so many hands, the SEC perceives a high potential for abuse.
In a further sign of the SEC’s focus on life sciences companies, on August 31, 2026, the SEC and FDA signed a Memorandum of Understanding (MOU) to facilitate the rapid sharing of information about FDA-regulated products and the companies that manufacture them. The MOU focuses principally on issuer disclosure, such as issuers’ representations about the status of FDA review, product approvals, and clinical trial results. But it also has implications for insider trading cases because access to FDA meeting information, review timelines, and communications with issuers helps the SEC establish when material information came into existence and who had access to it before it became public.
There were no private fund advisers accused of insider trading among the cases in the past few years, but there were a number of employees at advisers who were accused of improperly trading biotech issuers in their personal accounts (or accounts of relatives). For example, in SEC v. Ryan Squillante, the SEC accused the former Head of Equity Trading at an investment firm of trading on material nonpublic information he received when underwriters wall-crossed his employer on potential secondary offerings. He allegedly traded in his personal accounts on at least 12 occasions in the securities of 10 issuers, selling short because he knew that public announcement of the offerings would depress the issuers’ stock prices. In SEC v. JianQing Li the SEC alleged that Li, an analyst at an investment adviser, obtained material nonpublic information, including information about upcoming private placements and clinical trial results, after his employer was wall-crossed or entered into confidentiality agreements. He then used that nonpublic information to trade in the securities of 12 different issuers in his personal account and in an undisclosed account of a family investment entity he controlled. The SEC also alleged that Li was aware of his employer’s prohibition on personal trading in healthcare stocks, requirement to preclear all personal trades, prohibition on trading any securities on the firm’s restricted list, obligation to disclose all personal trades, and obligation to disclose all personal brokerage accounts—yet complied with none of those requirements. Li was also criminally charged.
Similarly, in SEC v. Rakesh Ahuja, the SEC alleged that Ahuja, a senior associate at a private fund adviser, had access to confidential information, including drug trial results, as a result of his employer entering into confidentiality agreements and being wall-crossed. On four occasions, Ahuja traded in a relative’s brokerage account based on that material nonpublic information. In two of those instances, Ahuja’s employer subsequently received a “name recognition letter” from FINRA, which listed Ahuja’s relative as a trader in the securities, and both times Ahuja stated that he did not recognize his relative’s name.
In SEC v. Conway, the SEC alleged that Conway, a client of an investment adviser, agreed in an email to keep confidential the information he received in connection with a direct investment in a private biotech company, including the identity of a public biotech company that was merging with the private company. In breach of the confidentiality agreement, Conway bought the public biotech company’s stock in 15 brokerage accounts belonging to him, his relatives, and family trusts. The public biotech company’s stock rose 215% when the merger was announced.
Finally, an older (2024) and unusual case, which did not involve a biotech company, is worth highlighting as a reminder to bring insider trading questions to compliance before trading. In Sound Point Capital Management, LP, the SEC brought an administrative proceeding against the firm for failing to maintain policies and procedures to reasonably prevent the misuse of material nonpublic information (it was not accused of insider trading). The facts of the case are a bit complicated, but essentially the firm knew it had MNPI about a company and it also held CLOs that contained loans to that restricted company. The portfolio manager contacted the firm’s compliance department to request approval to sell the CLOs, which the compliance department granted even though the firm had MNPI about one of the CLO’s holdings. When the MNPI about the company became public, the price of the CLO dropped by 11% (showing that the MNPI about the company had been material to the CLO). Certainly one of the reasons that the firm (or an individual) was not charged with insider trading was that the portfolio manager brought the situation to compliance for approval. The case illustrates that employees of advisers or brokers should always bring any insider trading concerns to compliance before trading and, even if an incorrect decision is ultimately reached as it appears to have been in Sound Point, the fact that the trader brought the matter in good faith to compliance can be a partial or complete defense to an insider trading claim.
Practical Considerations for Investment Advisers
Not every policy or procedure is appropriate for every firm, and each should be tailored to the specific circumstances and risks the firm faces. The items below are areas that firms should consider in light of their policies and investment activities.
- Encourage employees to bring any questions to compliance. Employees should be encouraged to bring any questions or concerns about potential insider trading to compliance/legal to protect both the employee and the firm. Firms should foster a culture of openness in which employees understand that no question is too trivial or “dumb” to bring to compliance’s attention.
- Biotech-specific training. Insider trading training for healthcare investment personnel should use concrete examples of the information likely to be material in the sector, including unannounced clinical trial data, FDA meeting feedback and designations, PIPE and follow-on offerings, and M&A activity. Training should also emphasize that the SEC pursues cases involving even modest profits and trading through relatives’ and friends’ accounts.
- Wall-cross and restricted list process. When a wall cross occurs, the issuer should be placed on the restricted list at the moment the firm learns the identity of the issuer, not when the firm decides whether to participate in the offering or when it receives access to a data room or other information. Limit distribution of information about the offering, slide decks, and data room logins to those who need them.
- Restriction begins with the first disclosure of the issuer. In Squillante, the first trade allegedly came minutes after an initial call with the underwriter, before the formal wall-cross email arrived. Policies should require anyone who receives outreach about a potential offering, including traders, analysts, and portfolio managers, to notify compliance immediately so the issuer can be restricted promptly, without waiting for written confirmation. Consider whether it is possible or practical to have wall-cross inquiries directed to compliance/legal instead of investment personnel.
- Keep issuers restricted until all material information is public. As highlighted by the Black Diamond trading in Ahuja, information received in connection with an offering (clinical trial information in that case) remains material and nonpublic even if the offering is abandoned. Removal from the restricted list should require confirmation that the issuer has publicly disclosed all MNPI received, that it has ceased to be MNPI, or cleansing conditions in the confidentiality agreement have been met.
- Disclosure of all personal accounts controlled. The Li and Ahuja cases both involved accounts that were not in the employee’s own name. Personal account reporting obligations should include accounts in which the access person has any direct or indirect beneficial ownership, including accounts of entities the person controls, and should require disclosure of accounts over which the person exercises trading authority. Employees should be reminded that the SEC routinely identifies illegal insider trading in the accounts of relatives and friends.
- Remind employees of the importance of following compliance policies. In Ahuja, the employee denied recognizing his relative’s name on FINRA trader identification lists. In Li, the analyst ignored a host of the firm’s compliance requirements. It is useful to remind employees that the SEC uses compliance lapses like these to show that employees acted intentionally and with knowledge of their wrongdoing, so failing to follow compliance policies can color what may otherwise have been innocent trading.
- Sharing information with clients and investors. As highlighted in Conway, firms that offer clients or fund investors access to co-investments or other direct investment opportunities that may involve MNPI about a public issuer should obtain signed confidentiality and non-use agreements and explain clearly that trading in the public company’s securities and passing on the confidential information are prohibited.
Whatever the perception that the SEC has significantly scaled back its enforcement activity, that is certainly not the case for insider trading. Moreover, trading in biotech securities will likely continue to garner a disproportionate share of the SEC’s attention, so biotech investors need to pay particular attention to their insider trading compliance.
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