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Federal Judge Allows SEC to Proceed on “Shadow Trading” Theory

January 19, 2022 Download PDF
  • A federal judge in San Francisco held on January 14 that an executive could be held liable for “shadow trading”—i.e., trading in securities of a similarly situated competitor’s shares while in possession of inside information about his own company.
  • The court held that information concerning a pending merger of the defendant’s company could be material to another company within the industry of the defendant’s employer, based in part on a finding that the relevant insider trading policy prohibited trading in shares of the company’s competitors while in possession of material nonpublic information.

A federal district judge permitted the Securities and Exchange Commission to pursue claims alleging that an executive had improperly traded in the securities of a competitor using confidential information obtained from his own employer, a practice termed by certain market observers as “shadow trading.” This differs from a more typical insider trading case in which an insider trades in the securities of his or her own company, or its direct counterparty (e.g., merger partner, customer or supplier), using confidential information from the insider’s company.  Here, the securities traded were issued by a company unrelated to either the insider’s company or the company’s merger partner except for the fact that they were participants in the same industry.

In denying the defendant’s motion to dismiss for failure to state a claim, Judge Orrick of the Northern District of California held in SEC v. Panuwat, No. 21-cv-6322, that confidential information about the acquisition of one company could be material to investors in another company uninvolved in the acquisition, and that trading on such information could be a breach of an executive’s fiduciary duty to his employer under the terms of the company’s insider trading policy. Although this is the first time the SEC has sued under a shadow trading theory, the ramifications of this case may depend on both how heavily concentrated the industry in question is and the specific language of any applicable insider trading policy, which in this case was held to have created the duty allegedly breached by the defendant.


Matthew Panuwat, the defendant, was a senior director of business development at the mid-cap, oncology biopharmaceutical firm Medivation. When he joined the firm, Panuwat agreed to abide by the company’s insider trading policy, which barred employees from profiting from material, nonpublic information concerning Medivation by trading in Medivation securities or “the securities of another publicly traded company, including all significant collaborators, customers, partners, suppliers, or competitors of” Medivation. As part of his role, Panuwat closely tracked the development pipelines, financial performance and valuations of competitors, including Incyte Corp., a similarly sized oncology biopharmaceutical firm.

In April 2016, Medivation began exploring a strategic merger. According to the SEC, Panuwat during this process received materials discussing and valuing Medivation’s peer companies, including Incyte. Medivation continued its search process through the summer. After receiving credible offers from several companies, Medivation agreed to merge with Pfizer, Inc., in mid-August 2016.

As alleged by the SEC, Panuwat purchased call options for Incyte stock minutes after learning of the pending Medivation merger. When the merger was announced to the market several days later, the stock price of Medivation, Incyte and other mid-cap biopharmaceutical companies significantly increased. Based on his purchases of Incyte shares, Panuwat allegedly realized just over $100,000 in profits from his call options.

Five years later, in August 2021, the SEC sued Panuwat for violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5 arising from these events. Panuwat moved to dismiss in November 2021.

The Court’s Ruling

Judge Orrick addressed three elements of securities fraud—materiality, breach of duty, and scienter—in his opinion denying Panuwat’s motion to dismiss.

Judge Orrick first found that, as alleged, the information concerning the then-pending Medivation-Pfizer merger could be material to an Incyte investor. Noting that Section 10(b) and Rule 10b-5 each prohibit trading of “any security” using “any manipulative or deceptive device,” and that Rule 10b-5 itself is explicitly non-exhaustive, the court reasoned that neither the statutory nor regulatory language requires the source of the information and the company issuing the traded securities to be the same. Given the limited number of companies in the same position as Medivation and the number of suitors willing to acquire such a firm, Judge Orrick held that the SEC had properly alleged that news of Medivation’s pending acquisition could be material to Incyte investors. He further found that the information Panuwat allegedly received during the search process was confidential and nonpublic.

Next, the court found that the SEC had properly alleged that Panuwat had breached a fiduciary duty to his employer, Medivation, by trading in Incyte’s stock. In so holding, Judge Orrick relied on the language of Medivation’s insider trading policy, which prohibited trading in “the securities of another publicly traded company, including all significant collaborators, customers, partners, suppliers, or competitors” based on confidential Medivation information. As Incyte was a publicly traded company, the court ruled that its securities were included in the policy’s prohibition.

Finally, Judge Orrick held that the SEC had sufficiently pleaded that Panuwat intended to trade in Incyte securities using material, non-public information. He based this ruling on the short period of time alleged to have elapsed between Panuwat’s receipt of the merger confirmation and his purchase of the call options, as well as his lack of trading in Incyte’s stock prior to his August 2016 purchase.

Judge Orrick also rejected a due process-based argument Panuwat had raised in his motion to dismiss.


As Judge Orrick observed, this case is the first time that the SEC has argued that information about one firm could be considered material to investors of another firm because of their similarity. Although the court reasoned that the scienter element of a securities fraud claim naturally limits the SEC’s ability to expand insider trading liability, this decision signals that the SEC may begin more aggressively pursuing enforcement proceedings in the context of smaller, more heavily concentrated industries, like specialty pharmaceuticals. In those industries, companies might be viewed as more directly comparable, thus potentially making it more likely that events relating to one company could be material to another within the same industry.

Additionally, the decision shows how courts may look to the broad language of Section 10(b) and Rule 10b-5, as well as any relevant insider trading policies, in their interpretation of such provisions.  The trading policy at issue in this case explicitly prohibited trading in the securities of “another public company,” including specifically “competitors”—language that the court relied upon in determining that Panuwat allegedly breached a duty owed to his own company and thus that the alleged conduct constituted insider trading.

Overall, the circumstances in this case—including the concentrated nature of the industry in question—could limit the impact of this ruling and the types of fact patterns to which the SEC could apply a shadow trading theory.  Moreover, given the extent to which Judge Orrick’s decision rested on the language of the insider trading policy at issue in this case, companies administering similar policies may wish to review the scope of such policies in light of this ruling and ensure that those subject to the policy are aware of that scope.

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