SEC v. Panuwat – Northern District Of California Jury Endorses SEC’s “Shadow Trading” Theory

On April 5, 2024, a jury in the Northern District of California found that Matthew Panuwat had misappropriated his employer’s confidential information and committed insider trading. The closely followed case represented the SEC’s first action under the so-called “shadow trading” theory. The SEC alleged that Panuwat possessed material nonpublic information (“MNPI”) that his employer, Medivation, would soon be acquired by Pfizer. The SEC further alleged that this information influenced his decision to purchase call options in a Medivation competitor—Incyte Corporation—because Panuwat believed the announcement of the Medivation acquisition would increase the stock prices of competitors. Despite the almost certain appeal of this decision to the Ninth Circuit, this verdict could strengthen the SEC’s resolve to bring more claims under the shadow trading theory and leaves open questions concerning whether legal and compliance officers should revise their insider trading policies and procedures to account for this development.

Panuwat was the head of business development at Medivation, an oncology company that developed a drug to treat prostate cancer. In 2016, Medivation solicited bids to be acquired by another biopharmaceutical company after defending itself against a public hostile takeover attempt. As the head of business development, Panuwat knew the details and timeline of the acquisition. Within seven minutes of receiving an email from Medivation’s CEO that Pfizer would finalize its acquisition over the coming few days, Panuwat purchased call options in Incyte, another oncology company that developed drugs to treat rare blood cancers. The SEC alleged that within days of the acquisition closing, Panuwat sold his options and gained approximately $120,000.

Panuwat challenged the viability of the SEC’s theory before trial, arguing that there could be no insider trading because Panuwat did not trade in the securities of Medivation or Pfizer (the parties to the acquisition). The District Court rejected these challenges, finding that Rule 10(b)-5 prohibits insider trading of “any security” using “any manipulative or deceptive device,” and does not merely prohibit trading in securities of companies to which the MNPI directly relates (i.e., Medication or Pfizer) or to which trader owes a direct duty of confidentiality. See “California District Court Allows Novel SEC Insider Trading Theory To Proceed”.

At trial, the SEC elicited testimony and argued that the Medivation acquisition and its closing date were MNPI; that Incyte was a sufficiently close competitor of Medivation that the MNPI concerning Medivation’s expected acquisition was material to Incyte; that Medivation’s insider trading policy was broad enough to preclude trading in both the securities of Medivation and the securities of another public company, while in possession of such MNPI, and that Panuwat owed a broad duty of confidentiality to Medivation irrespective of what the policy said; and that the close timing correlation of Panuwat’s trades to the CEO’s email demonstrated that the trades were based on the MNPI.

Panuwat testified in his own defense and asserted that he did not purchase Incyte call options based on Medivation’s MNPI. Panuwat further testified that Medivation and Incyte were not comparable or related companies or competitors—they operated under different business models, produced different drugs that treated different types of cancers, had different market caps and served different customers. Panuwat also challenged the SEC’s characterization of the scope of Medivation’s insider trading policy and his duties of confidentiality, arguing that they did not forbid Panuwat from trading in all securities relating to the biopharma industry, and claimed that information relating to the Medivation acquisition had already been disseminated to the market. Panuwat also testified that there was nothing unusual about his Incyte trade and that it fit within his general trading strategy.

The jury deliberated less than one day before finding Panuwat liable for insider trading. After trial, the SEC stated that there was nothing “novel” about this case, claiming it was simply another application of its longstanding misappropriation theory of insider trading in that Panuwat traded on MNPI obtained from his employer for his personal gain. See “SEC Statement on Jury’s Verdict in Trial of Matthew Panuwat”. Regardless of whether the case relied on established principles, however, it is the first time the SEC pursued, and the first time a court considered a misappropriation theory based on “shadow trading.” The SEC’s success in this high-profile and controversial case will thus be a helpful precedent for the SEC and federal prosecutors to pursue similar types of insider trading claims.

While still subject to appeal, this case poses new challenges for compliance officers and legal professionals in the investment community. These challenges include how to scope companies’ insider trading policy, as the breadth of Medivation’s insider trading policy was a key fact that supported the SEC’s theory, and whether and to what extent companies should restrict trading in securities of issues that could be deemed competitors of, or closely related to, issuers about which a company has obtained MNPI. Even during the pendency of the expected appeal, issuers should strongly consider taking this opportunity to reevaluate their insider trading policies to ensure that they best serve their intended purposes.