This note addresses the potential legality or illegality of channel checking in the context of a private equity buyout. In Part II, this note uses a hypothetical to demonstrate a situation in which a private equity acquirer might engage in a channel check. In Part III, this note analyzes federal judicial and SEC cases that have developed various categories of insider trading liability, and provides a framework for insider trading liability. In Part IV, this note applies the analysis from Part III to the hypothetical described in Part II. Part IV attempts to reach a conclusion about whether the private equity acquirer, who engages in channel checking, could be found liable for insider trading given the current law. Part IV asks whether channel checkers should face potential insider trading liability, and concludes that the SEC’s newfound focus on channel checking should be directed to regulating more harmful conduct.
Michael Byun, Channel Checking and Insider Trading Liability, 2 MICH. J. PRIVATE EQUITY & VENTURE CAPITAL L. 345 (2013).