Federal Jury Finds Defendant Liable in SEC “Shadow Trading” Case

On Friday, April 5, 2024, a jury in the Northern District of California found that the SEC had established that Defendant Matthew Panuwat, a former senior director of business development at biopharmaceutical firm Medivation, was liable under a civil misappropriation theory of insider trading for violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5. The background to the SEC’s case is discussed in our previous client alerts on the court’s denial of Panuwat’s motion to dismiss and later denial of his motion for summary judgment. Panuwat bought $117,000 in call options in the stock of biopharmaceutical firm Incyte seven minutes after receiving an email from Medivation’s CEO that Medivation was “on track to sign [a] deal” for Pfizer to acquire Medivation. When the merger was announced four days later, Incyte’s stock price increased, and Panuwat began selling shares, realizing over $100,000 in profits. This insider trading theory is known as “shadow trading”— possessing insider information about a company and trading in the shares of a similarly situated competitor.

The trial lasted eight days. The SEC called as witnesses an investment banker who worked on the Medivation-Pfizer deal, who testified as to Panuwat’s involvement in the confidential bidding process, and the SEC’s deputy chief economist, who testified that market observers would have expected a “spillover effect” on Incyte’s stock after the Medivation-Pfizer deal was announced. This “spillover effect” was to be expected, she testified, because analyst reporting had linked Medivation and Incyte before the deal was announced and noted they were similarly situated and because, when a company makes a big announcement that causes an increase in its stock price, it is typical to see a similar bump in stock price across the industry. In pursuing the lawsuit, the SEC has relied on, among other things, Medivation’s insider trading policy, which prohibited trading in a non-exhaustive list of other public companies’ securities, to help establish that Panuwat had breached a duty of trust and confidence he owed to Medivation.

Panuwat called his former Medivation colleague, who testified that Medivation and Incyte were not competitors and that he did not see a correlation between their stocks, before Panuwat took the stand to explain that he had been monitoring Incyte stock for over a month before buying call options, after reading an analyst report recommending purchasing Incyte call options. Panuwat’s lawyers argued that he could not have had an intent to defraud because he did not think that trading in Incyte stock could be considered insider trading. On cross examination, the SEC probed why Panuwat now had a detailed explanation for his purchase, but had not provided this explanation in his earlier deposition testimony, and repeatedly questioned Panuwat whether his purchase of Incyte call options moments after receiving an email about the Medivation-Pfizer deal was “just a coincidence.”

After the jury returned its verdict, the presiding judge, Judge Orrick, requested that the parties submit a joint statement on proposed remedies and offered to assign a magistrate judge to assist in that process. The SEC is seeking a fine up to three times Panuwat’s trading gain and to bar Panuwat from serving as an officer or director of any public company. Panuwat is likely to appeal the judgment to the Ninth Circuit, which may consider whether “shadow trading” is able to support a Section 10(b) and Rule 10b-5 claim as a matter of law and if there was sufficient evidence to support the jury verdict.

The SEC released a statement from Division of Enforcement Director Gurbir Grewal that the case was “nothing novel” and was instead “insider trading, pure and simple.” But as we have previously observed, this case marks what appears to be the first time the SEC has brought a lawsuit alleging that information about one company could be considered material to investors in another company because of the companies’ substantial similarities or connections. The verdict is thus likely to embolden the SEC’s enforcement of suspected “shadow trading” where it believes there is sufficient evidence of correlation between the stock performance of two companies and that information material to one company would be considered material to investors in the other. As we have previously noted, the SEC’s action also underscores the importance of the specific terms of a company’s insider trading policy to the question of whether an employee has breached a relevant duty by engaging in shadow trading. Companies may wish to review the scope of their insider trading policy and ensure that those subject to the policy are aware of its scope.

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