Trial Court Blesses Shadow Insider Trading

A federal jury found Matthew Panuwat liable for insider trading late last week.  As you may recall, the U.S. Securities and Exchange Commission (SEC) brought an enforcement action against Mr. Panuwat in the U.S. District Court for the Northern District of California back in August 2021.  In that legal action, the SEC alleged that Mr Panuwat violated Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5, seeking a permanent injunction, a civil penalty, and an officer and director bar. The theory of the case, as described by the SEC in a litigation release, was founded on Mr. Panuwat's deception of his employer, Medivation, Inc., by using information obtained through his employment to trade in the securities of another firm in the same industry.

Matthew Panuwat, the then-head of business development at Medivation, a mid-sized, oncology-focused biopharmaceutical company, purchased short-term, out-of-the-money stock options in Incyte Corporation, another mid-cap oncology-focused biopharmaceutical company, just days before the August 22, 2016 announcement that Pfizer would acquire Medivation at a significant premium. Panuwat allegedly purchased the options within minutes of learning highly confidential information concerning the merger. According to the complaint, Panuwat knew that investment bankers had cited Incyte as a comparable company in discussions with Medivation and he anticipated that the acquisition of Medivation would likely lead to an increase in Incyte's stock price. The complaint alleges that Medivation's insider trading policy expressly forbade Panuwat from using confidential information he acquired at Medivation to trade in the securities of any other publicly-traded company. Following the announcement of Medivation's acquisition, Incyte's stock price increased by approximately 8%. The complaint alleges that, by trading ahead of the announcement, Panuwat generated illicit profits of $107,066.

The SEC's theory of liability, an application of insider trading's misappropriation doctrine as endorsed by the U.S. Supreme Court in U.S. v. O'Hagan, has been labeled "shadow trading."

The Director of the SEC's Division of Enforcement, Gurbir S. Grewal, put it plainly in responding to the jury verdict in the Panuwat case on Friday:

As we’ve said all along, there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple. Defendant used highly confidential information about an impending announcement of the acquisition of biopharmaceutical company Medivation, Inc., the company where he worked, by Pfizer Inc. to trade ahead of the news for his own enrichment. Rather than buying the securities of Medivation, however, Panuwat used his employer’s confidential information to acquire a large stake in call options of another comparable public company, Incyte Corporation, whose share price increased materially on the important news.

Yet, many assert that the SEC's theory in Panuwat broadens the potential for SEC insider trading violations and enforcement.  See, e.g., here, here, and here. They include:

• a wide class of nonpublic information that may be determined to be material and give rise to an insider trading claim;
• the expansive scope of insider trading's requisite duty of trust and confidence (and the potential importance of language in an insider trading compliance policy or confidentiality agreement in defining that duty); and
• the potentially large number of circumstances in which employees may be exposed to confidential information about their employer that represents a value proposition in another firm's securities.

Three of us on the BLPB have held some fascination regarding the Panuwat case over the past three years.  Ann put the case on the blog's radar screen; John later offered perspectives based on the language of Medivation's insider trading compliance policy; and I offered comments on John's post (and now offer this post of my own).  I am thinking we all may have more to say on shadow trading as additional cases are brought or as this case further develops on appeal (should there be one).  But in the interim, we at least know that one jury has agreed with the SEC's shadow trading theory of liability.