Reported by Patricia A. Pileggi , Brittany H. Sokoloff , William P. Ziegelmueller Of ArentFox Schiff LLP

On November 20, 2023, the Northern District of California denied summary judgment for the defendant in SEC v. Panuwat, an enforcement action being brought under a novel theory of insider trading law that is being referred to as shadow trading.

Classically, insider trading occurs when a corporate insider commits securities fraud by trading in the securities of their own company on the basis of material nonpublic information (MNPI). In 2000, the US Securities and Exchange Commission (SEC) codified in Rule 10b5-1 a second form of insider trading — the misappropriation theory — which targets trading in the securities of a potential acquiror or merger partner. Rule 10b5-1 prohibits directors, corporate insiders, and anyone who has obtained MNPI from buying or selling a security in breach of a duty owed to the source of the information. Shadow trading is an expansion of the misappropriation theory of insider trading. It involves buying or selling securities of one company while in possession of MNPI about an “economically-linked” company.

The Panuwat case is the first to address shadow trading, and it has captured the attention of market observers, including private fund managers and other institutional investors, who are wondering what this issue of first impression means for the future of insider trading prosecution. For now, the court’s decision to deny Panuwalt’s motion for summary judgment has sanctioned the SEC’s broad read of insider trading law. Coupled with the US Department of Justice’s (DOJ) revised guidelines on corporate compliance policies, this ruling should prompt companies handling MNPI to revise their compliance policies to address shadow trading.

Background

On August 17, 2021, the SEC filed a complaint accusing Matthew Panuwat, formerly the business development executive of Medivation, Inc., of violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 by purchasing call options in Incyte Corporation.

Medivation is a mid-sized oncology-focused biopharmaceutical company. On the heels of an attempted hostile takeover in March 2016, Medivation began to explore a potential acquisition. Panuwat’s role gave him some insight into the sale process — he participated in meetings with investment bankers and had access to presentations that discussed the impact that a Medivation acquisition would have on Medivation’s peer companies in the biopharmaceutical industry. Incyte was one of the peer companies mentioned in those presentations.

The undisputed facts at summary judgment[1] established that:

• Panuwalt was apprised of confidential details about the sale process as he helped Medivation search for a buyer, and as he analyzed the impact of the future sale.
• On August 14, 2016, Panuwat was one of the select Medivation employees to learn that Medivation intended to publicly announce the acquisition on August 22.
• On August 18, 2016, Medivation’s CEO sent Panuwat and 12 other Medivation employees an email stating that “‘Picasso’ (Pfizer) had ‘reiterated how much they really want this,’ that Pfizer wanted the deal ‘in this weekend’ and named a specific price point for it.”[2] (the August 18 email).
• Seven minutes later, Panuwat started purchasing Incyte call option contracts. He purchased 578 Incyte call options for a total of $116,905.
• Medivation publicly announced that it would be acquired by Pfizer on August 22, before the markets opened. That day, Incyte’s stock price closed 7.7% higher than the prior trading day’s close.
• Two days later, Panuwat sold 300 of the 578 Incyte call options for a profit; he sold the remainder the following month. Panuwat made a total profit of $120,031.32.

The SEC filed suit on August 17, 2021, alleging that Panuwat’s trades violated Section 10(b) of the Exchange Act and Rule 10b-5. We briefly address the court’s findings on summary judgment because it informs the changes that compliance officers should begin incorporating in their insider trading policies.

Read full report: https://www.natlawreview.com/article/compliance-officers-beware-sec-looking-expand-reach-insider-trading?amp