Fall 2024 Corporate Communicator

Dear clients and friends,

In this issue of the Corporate Communicator, we summarize a disconcerting case in which for the first time a court found an individual guilty of insider trading under the paradigm colloquially referred to as “shadow trading.”

Very truly yours,

The Snell & Wilmer Corporate & Securities Practice Group

On April 5, 2024, the Securities and Exchange Commission (“SEC”) obtained its first favorable insider trading verdict based on “shadow trading.” The SEC filed suit against Matthew Panuwat, claiming that he accessed highly confidential information regarding the intentions of a global biopharmaceutical company (“Company A”) to acquire his employer, Medivation, Inc. (“Medivation”), and used that information to execute a trade ahead of the public announcement of the acquisition. What distinguishes Panuwat’s case from other insider trading cases is the fact that while Panuwat used his employer’s information to trade stock options, he did not trade stock options of his employer (Medivation), or of the company with which it was engaged in a business transaction (Company A). Rather, the SEC alleged that Panuwat used the confidential information of Medivation to purchase call options in another company, Incyte Corp. (“Incyte”), an allegedly closely comparable company to Medivation. As such, Panuwat marks the first case in which the SEC successfully challenged what is colloquially referred to as “shadow trading.”

I. Background

Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), prohibits individuals from committing fraud or deceit when buying or selling securities. More specifically, this section makes it illegal:

“To use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.”

This broad statute has evolved through enforcement actions, litigation, and prosecution to include a prohibition against what is commonly referred to as “insider trading”.

Shadow trading is a new paradigm of insider trading in which an individual buys or sells the securities of a company based on confidential information of another related, economically linked, or competing company. Panuwat marks the first time that the SEC successfully convicted an individual of shadow trading and, as such, raises the possible expansion of existing insider trading law.

II. SEC v. Panuwat

From 2014 to 2017, Panuwat worked for Medivation, a mid-cap biopharmaceutical company, serving the company as its senior director of business development. During his tenure, Panuwat was tasked with identifying and assessing various product and development expansion opportunities and pursuing those opportunities through acquisitions and in-licensing. In order to do so, Panuwat “closely tracked the stock prices, drug products, and development pipelines of other biopharmaceutical companies,”¹ and regularly accessed Medivation’s confidential information, including information regarding actual or potential acquisitions of or by Medivation. In connection with this employment, Panuwat received and signed Medivation’s insider trading policy, which read as follows:

“During the course of your employment . . . you may receive important information that is not yet publicly disseminated . . . about the Company . . . . Because of your access to this information, you may be in a position to profit financially by buying or selling or in some other way dealing in the Company’s securities . . . or the securities of another publicly traded company, including all significant collaborators, customers, partners, suppliers, or competitors of the Company . . . . For anyone to use such information to gain personal benefit . . . is illegal.”²

In April of 2016, Medivation engaged investment banks to assist the company in exploring opportunities to merge with another company. Medivation’s board of directors subsequently held a meeting to authorize Medivation’s advisors to send letters soliciting final bids. Panuwat attended that board meeting and further received copies of the bid letters. A few months later, Medivation’s CEO sent the company’s executives, including Panuwat, an email stating that [Company A] was “overwhelming[ly]”³ interested in acquiring Medivation, and that the final details of the pending acquisition were soon to come. Mere minutes after receiving this email, Panuwat purchased 578 call option contracts of Incyte, another mid-cap biopharmaceutical company and a competitor of Medivation. Once the public announcement regarding the acquisition was released, Incyte’s stock price increased by approximately 8%. Panuwat ultimately earned $107,066 in profits as a result of his Incyte stock option purchase.

On August 17, 2021, the SEC brought suit against Panuwat, alleging that he violated Section 10(b) of and Rule 10b-5 under the Exchange Act by trading securities in connection with a “manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe.”

Shortly thereafter, on January 14, 2022, the District Court for the Northern District of California denied a motion to dismiss filed by Panuwat. The Court stated that the core issue of the motion concerned whether Panuwat breached a duty to Medivation by purportedly using the information about Company A’s interest in acquiring Medivation to buy Incyte stock options. Panuwat claimed that Medivation’s insider trading policy did not prohibit him from trading Incyte securities. The Court disagreed. Ultimately, the Court found that Panuwat had a duty to Medivation stemming from (1) the plain language of Medivation’s insider trading policy, (2) a confidentiality agreement that he signed, and (3) principles of agency law. On March 25, 2024, the Court again denied Panuwat’s motion for summary judgment on similar grounds.

Finally, on April 5, 2024, at the conclusion of an eight-day trial, a jury found Panuwat liable for insider trading in violation of Section 10(b) of and Rule 10b-5 under the Exchange Act. The Court subsequently heard Panuwat’s motion for a new trial and renewed motion for judgment as a matter of law, but denied it on September 9, 2024, stating that Panuwat’s “one-time conduct was a serious violation of the law that deserves a remedy that will deter him and others from similar conduct.”⁴ Interestingly, the Court declined to prohibit Panuwat from serving as an officer or director of a public company, explicitly stating that it had no desire to “permanently damage his career in the way that imposition of the officer/director bar would.”⁵ Nevertheless, Panuwat received the maximum civil penalty for his insider trading: $321,197, or three times the profit he gained from his trade.

III. Takeaways

Despite the fact that the SEC has failed to successfully prosecute shadow trading until Panuwat, the SEC maintains the stance that shadow trading has always constituted insider trading and, as such, was always impermissible (i.e., pre-Panuwat as well). As was stated by the Director of the SEC’s Division of Enforcement, “there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple.”⁶ The extension of the insider trading paradigm to include “shadow trading” has been critiqued by many practitioners, including us, as a bridge too far that could lead to a dangerous expansion of insider trading law to transactions far attenuated from the company(ies) to which the alleged insider information actually pertains. Nevertheless, in light of Panuwat, companies should consider reevaluating their insider trading policies to better define what constitutes material non-public information.