Jury Finds Former Executive Liable in Novel Shadow Insider Trading Case

The Securities and Exchange Commission’s aggressive pursuit of a novel and expansive theory of insider trading has earned an imprimatur of approval by a jury. On April 5, 2024, in less than two hours following an eight-day trial in a San Francisco federal court, pharmaceutical company executive Matthew Panuwat was found guilty of so-called “shadow insider trading,” trading in a competitor’s securities based on inside information that his own company was about to be acquired. Although the SEC Director of Enforcement said in announcing the verdict that “there was nothing novel about this matter” and “this was insider trading, pure and simple,” Securities and Exchange Commission v. Panuwat, has been widely viewed as a test case for the shadow insider trading theory. The case is a major victory for the SEC, which may now be emboldened to bring even more cases involving trading in competitor- or peer-company securities.

The facts and circumstances of Panuwat’s trading no doubt persuaded the jury’s finding him liable for insider trading. The SEC alleged that Panuwat, who worked at mid-cap oncology drug company Medivation, traded call options in a Medivation competitor based on nonpublic information that Pfizer was going to acquire Medivation. The SEC presented evidence that, on August 18, 2016, Panuwat received an email from Medivation’s CEO stating that Pfizer wanted to acquire Medivation “this weekend” and providing the purchase price. The evidence also showed that seven minutes after getting the email, Panuwat started buying call options in Incyte, another mid-cap oncology drug company that was not involved in the Pfizer-Medivation transaction. Over a roughly 30-minute period, Panuwat purchased 578 Incyte call options for about $117,000. On August 22, 2016, Pfizer’s acquisition of Medivation was disclosed publicly, and Incyte’s stock price rose almost eight percent. Panuwat then sold the Incyte call options, making over $120,000.

The SEC argued that Panuwat was liable under the “misappropriation theory” of insider trading. The misappropriation theory involves trading on the basis of material non-public information in breach of a duty, arising from a relationship of trust and confidence, owed to the source of the information. In Panuwat, the theory required the SEC to establish that Panuwat bought Incyte call options based on material nonpublic information about Incyte, in breach of a duty he owed to Medivation. The SEC’s novel application of the misappropriation theory was tested in the two main challenges that the SEC overcame at trial in establishing that (i) the information Panuwat possessed about Pfizer’s acquisition of Medivation was material information relating to Incyte, and (ii) Panuwat breached a duty to Medivation when he traded in Incyte’s call options.

Materiality

At trial, the SEC claimed that the eight-percent increase in Incyte’s stock price after the announcement of the Medivation acquisition was evidence that the transaction was material to Incyte. The SEC also relied on analyst reports and news articles in the financial press that repeatedly linked an acquisition of Medivation to Incyte’s future and evidence that Medivation’s investment bankers considered Incyte a “comparable peer.” According to the SEC, the presentations those investment bankers made to investors supported the inference that Medivation’s sale would boost Incyte’s stock price by making Incyte one of the few remaining mid-cap oncology-focused drug companies. Additionally, the SEC took the position that the timing of Panuwat’s purchases—seven minutes after getting the email about the acquisition—showed that he believed that the information was material to Incyte.

Duty

The SEC predicated Panuwat’s breach of duty on three bases. First, the SEC maintained that Panuwat’s trades violated Medivation’s insider trading policy that broadly applied to trades in other public companies that included, among others, competitors. Second, the SEC relied on Medivation’s confidentiality agreement that obligated Panuwat to “hold [Medivation information] in strictest confidence, and not use, except for the benefit of [Medivation].” Third, the SEC argued that Panuwat’s duty to Medivation could be based on traditional principles of agency law that would establish Panuwat’s duty not to use Medivation’s material information for personal gain.

Obtaining a favorable jury verdict in this closely scrutinized case will likely embolden the SEC to bring additional cases alleging shadow insider trading. The Panuwat case presented a relatively unique and discrete set of facts and circumstances concerning trade timing and the close “market connection” between Medivation and Incyte, but these facts are likely not the only possible scenarios involving trading in a competitor that could invite SEC scrutiny. Company executives would be wise to consult with counsel to assess whether trading in the securities of their employer’s competitors or peers, among other industry participants, may expose them to insider-trading liability. Companies may want to consult outside counsel to assess their insider trading policies and determine whether to provide additional training and guidance to their employees.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Sharon M. Bunzel, an O’Melveny partner licensed to practice law in California; Jorge deNeve, an O’Melveny partner licensed to practice law in California; Andrew J. Geist, an O’Melveny partner licensed to practice law in New York; Mia N. Gonzalez, an O’Melveny partner licensed to practice law in New York; Michele W. Layne, an O’Melveny of counsel licensed to practice law in California; Waqas A. Akmal, an O’Melveny counsel licensed to practice law in California; Bill Martin, an O’Melveny counsel licensed to practice law in New York; and Danny Hirsch, an O’Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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