Walleye v. Silver Lake: Non-Compete Clauses and Insider Trading Risks in Hedge Funds

The recent dismissal of Walleye v. Silver Lake by the Ninth Circuit Court of Appeals underscores a critical lesson for investors: the legal and regulatory risks embedded in hedge fund operations can significantly impact investment outcomes. This case, which centered on allegations of insider trading by Intelsat S.A. shareholders, highlights the stringent evidentiary standards required to prove securities fraud—and the importance of due diligence in evaluating funds' governance and legal exposure. For investors, the ruling serves as a cautionary tale about the challenges of holding funds accountable for opaque decision-making and the role of non-compete clauses in mitigating insider threats.

Key Takeaways from the Walleye v. Silver Lake Case

The court dismissed Walleye's claims against Silver Lake, BC Partners, and David McGlade because the plaintiffs failed to sufficiently prove two critical elements:
1. Possession of Material Non-Public Information: Walleye did not provide specific details about how the defendants obtained information about the FCC's November 2019 meeting, which signaled declining support for Intelsat's C-Band spectrum auction plan. The Ninth Circuit emphasized that conclusory allegations—such as generalized access to information—fall short of the heightened pleading standards under the Private Securities Litigation Reform Act (PSLRA).
2. Materiality of the Information: Even if the defendants had such information, the court found it immaterial because public discourse already reflected risks related to the FCC's stance. Materiality requires that information would “significantly alter the total mix” of investor knowledge—a high bar that Walleye could not clear.

The ruling reaffirms that proving insider trading is a legal high-wire act, requiring plaintiffs to pinpoint precise facts about how, when, and why non-public information was used. For investors, this means skepticism is warranted when evaluating claims about a fund's compliance with securities laws or its exposure to legal risks.

Implications for Investors: Legal Risks and Governance Gaps

While the case did not directly involve non-compete clauses, the broader theme of information control is central to understanding insider trading risks. Non-compete clauses in employment contracts are often a tool for hedge funds to limit employees' ability to share proprietary information or trade on insights. However, the Walleye case reveals a deeper issue: even with robust contractual safeguards, proving that such clauses were violated—or that material information was misused—requires a level of evidentiary specificity that plaintiffs often lack.

Investors should ask:
- Does the fund have clear policies to prevent insider trading, such as restricted trading windows or compliance audits?
- Are there historical instances of legal disputes or regulatory scrutiny against the fund's managers or affiliated entities?
- How does the fund structure its due diligence on investments involving companies with regulatory or political risks (e.g., FCC approvals)?

The dismissal of Walleye's claims also underscores a systemic challenge: hedge funds often operate in gray areas where information asymmetry is a feature, not a bug. Funds with opaque decision-making processes or weak governance frameworks are more likely to face accusations of using non-public information, even if they ultimately prevail in court.

Investment Strategy: Scrutinizing Legal Exposure and Governance

The Walleye case offers actionable advice for investors:
1. Prioritize Funds with Transparent Governance: Look for funds that disclose their compliance protocols, legal history, and measures to mitigate insider trading risks. Funds with a track record of avoiding regulatory penalties are preferable.
2. Avoid Overexposure to High-Risk Sectors: Sectors like telecom or satellite infrastructure (as in this case) involve regulatory approvals and political variables that can lead to sudden valuation shifts. Diversify investments to limit exposure to companies with contingent liabilities tied to non-public information.
3. Monitor Regulatory Changes: The SEC's ongoing focus on insider trading and the use of “dark pools” or private transactions (like the after-hours block sale in this case) could increase scrutiny on hedge funds. Stay informed about enforcement trends.

Conclusion: Legal Risks Are Part of the Investment Landscape

The Walleye v. Silver Lake case is a reminder that legal risks are not abstract—they directly affect asset values and investor confidence. While the plaintiffs' failure to meet evidentiary standards shielded the defendants here, it does not absolve hedge funds of accountability. Investors must treat governance and legal compliance as core components of risk assessment. In an era where information is the ultimate asset, funds that cannot demonstrate rigorous controls over it—whether through non-compete clauses, compliance audits, or transparent processes—should be approached with caution.

For now, the takeaway is clear: when evaluating hedge funds, dig deeper into their legal frameworks and historical behavior. The courts may dismiss claims, but the reputational and financial damage from even unfounded accusations can linger long after a lawsuit ends.