Compliance Officers Beware: the SEC is Looking to Expand the Reach of Insider Trading

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.


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.

The Court Denied Summary Judgment

In denying Panuwat’s motion for summary judgment, the court found questions of fact existed as to whether Panuwat (1) was in possession of MNPI, (2) breached a duty of confidentiality he owed to Medivation, the source of the information, and (3) acted with scienter.

Materiality. In addressing the question of materiality, the court accepted the SEC’s position that material information did not have to come from the company being traded and that information could be material to more than one company.[3] Proof of a market connection between the two companies was critical; the SEC had to show that Panuwat understood that any confidential information he learned about Medivation was also material to Incyte because the companies “were connected as part of a niche section of the biopharmaceutical market.”[4]

Non-public Information. Although the market was aware of the sale process, the “final details of the transaction — the final buyer, the final price, and the ultimate timing of the execution of the merger — were not yet known to the market on August 18, 2016.”[5] The court found a question of fact as to whether (1) Panuwat had access to these final details, including whether he read the August 18 email and (2) the information in the August 18 email was material and nonpublic because it was reliable and more detailed than rumors and press reports about the transaction.[6]

Duty. The court found three ways Panuwat could have breached his duty to keep confidential the information he learned about the acquisition:

Scienter. Because the court found a question of fact as to whether Panuwat received and read the August 18 email, a reasonable jury could find he had the requisite scienter. The court focused on the timing of Panuwat’s purchase, noting that “the proximity between Panuwat’s receipt of the email and his initiation of the trades … raises a strong suspicion of scienter.”[11] The court also considered Panuwat’s trading history, which previously included only limited trading in call options.

Compliance Concerns

The court’s decision in Panuwat preserves for now the SEC’s ability to pursue claims based on shadow trading. Especially in light of DOJ’s March 2023 guidance on compliance[12], which puts new focus on whether corporate compliance programs appropriately identify violations of laws, regulations, and policies, and which expects companies to promptly provide information on culpable actors or risk losing cooperation credit, companies may find it prudent to amend their compliance policies to recognize the risks of shadow trading.

First, public companies, broker dealers, and SEC-registered advisors should work with outside counsel to update their compliance policies to define and restrict shadow trading. In Panuwat, the court left open the question of whether Medivation’s insider trading policy and confidentiality agreement precluded trading on MNPI that affected any publicly traded company. The court found that Panuwat could have breached his duty to Medivation to abstain from trading, as set forth in those documents, and committed insider trading under the misappropriation theory. In light of the court’s finding that insiders may have a duty to avoid shadow trading, publicly traded companies (and SEC-registered advisors who possess such MNPI) should amend their policies to broadly restrict trading based on MNPI. A company should avoid being perceived as endorsing a policy that simply restricts trading in the stock of the company, its customers, and affiliates. Considering DOJ’s recent guidance, it is important for companies to identify violations of laws, regulations, and policies, which for now, appears to include violations by shadow trading.

Shadow trading will be challenging to define and even harder to identify. Compliance departments will first need to decide whether they have a connection to certain industries and companies within those industries. Broker dealers and asset managers need to expand their watch lists to include trading in the securities of third-party companies or industries that may be affected by MNPI acquired through non-disclosure agreements. Determining which companies are comparable is a fact-intensive and subjective inquiry. With Panuwat, there remains disagreement on whether Medivation and Incyte are comparable companies. Both are mid-cap biopharmaceutical companies with oncology product offerings, but they have no overlap of approved drug products, they have different marketed product portfolios, and they do not consider each other to be competitors. The disconnect between Panuwat and the SEC can similarly exist between the companies a compliance department flags as comparable and the companies the SEC determines to be comparable. Ultimately it might be beneficial to restrict sector-specific trading for individuals most likely to obtain MNPI regarding the industry’s movements. The same counsel serves broker dealers and SEC-registered advisors who acquire vast quantities of confidential data on a variety of industries.

Once compliance departments determine the types of trades that should be restricted, they should then conduct surveillance and monitoring to help ensure that individuals with access to MNPI do not trade in securities that are economically tied to that MNPI.

Finally, compliance professionals should monitor the progress of the Panuwat case and include its holdings in company trainings on how to handle MNPI.

[1] Order on MSJ, Doc. 85 at 3-5.

[2] Id. at 4:15-21.

[3] Id. at 8:6-8.

[4] Id. at 8:15-18.

[5] Id. at 12:21-13:8 (internal quotations omitted, emphasis retained)

[6] Id. at 13:12-14:4.

[7] Id. at 16:7-13. 

[8] Id. at 16-17. 

[9] Id. at 18:1-4.

[10] Id. at 18:11-17.

[11] Id. at 21:12-16.

[12] In contrast to the SEC’s civil remedies, DOJ’s guidance focuses on avoiding criminal liability.


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