SEC Brings Insider Trading Charges Based On Novel Theory
On August 17, 2021, the Securities and Exchange Commission (“SEC”) charged a former executive of California-based biopharmaceutical company Medivation Inc. with violating § 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 for allegedly relying upon inside information he obtained through the course of his employment at Medivation to purchase stock of a different company, Incyte Corp., a practice that some academics have dubbed “shadow trading.” According to the SEC’s complaint—filed in the United States District Court for the Northern District of California—Matthew Panuwat, the then-head of business development at Medivation, purchased short-term, out-of-the money stock options in Incyte Corp., a biopharmaceutical company similar to Medivation, immediately after learning that Medivation would soon announce its upcoming acquisition by Pfizer. The SEC claims that Panuwat knew that investment bankers engaged by Medivation had cited Incyte as a comparable company in their valuation analysis and that the announcement of Medivation’s sale to Pfizer would likely cause Incyte’s stock price to increase. This is one of the SEC’s first enforcement actions based on this novel theory, and Panuwat may be expected to vigorously contest not only the facts but the legal underpinnings of the SEC’s complaint.
The SEC alleges that Medivation engaged investment bankers to assess the strategic benefits of an acquisition after receiving interest from another pharmaceutical company. As a former investment banker himself, Panuwat allegedly worked closely with the bankers through this process and thereby received presentations from them that drew what the SEC termed “close parallels between Medivation and Incyte.” From these presentations, Panuwat allegedly concluded that if Medivation was acquired, Incyte’s stock price would increase. The complaint claims that when Medivation’s CEO later told Panuwat and others of Pfizer’s “impending acquisition” of Medivation, Panuwat accessed his personal brokerage account “within minutes,” and—without clearing the trade, as required by company policy—purchased Incyte call options, despite not expecting any significant announcements from Incyte before the options’ expiration date. After the merger was announced, Medivation’s stock price rose approximately 20% whereas Incyte’s stock rose by approximately 8%. Panuwat allegedly profited from this jump in Incyte’s stock price, although the complaint does not explicitly allege whether or when Panuwat sold his options.
Assuming that the SEC can meet its burden of proving that Panuwat traded Incyte on the basis of the material nonpublic information (MNPI) he received as a result of his employment at Medivation, a key question will be whether Panuwat breached a duty to Medivation. In its complaint, the SEC attempts to address this by alleging that “as an employee and agent of Medivation, Panuwat owed Medivation a duty of trust and confidence, including a duty to refrain from using Medivation’s proprietary information for his own personal gain.” It is also unclear how far the SEC might seek to extend this theory or how courts would when two companies were sufficiently correlated in size, profile, product, or stock price such that insiders in one company should be prevented from trading in the security of the other. Even less clear is when, if ever, such a concept could apply to third parties such a broker-dealers or buy-side firms such as mutual funds and hedge funds that are privy to material non-public information appropriately with respect to a particular company with correlated competitors. This case will be watched closely as it proceeds and clients may wish to think about how this concept might apply to their business and employees.