An April 5 verdict in a groundbreaking insider trading enforcement action by the Securities and Exchange Commission highlights the potential for expanded risks of stock trading for officers and directors of publicly traded companies. It also potentially expands concerns about insider trading to directors and officers of private companies.
The type of trading targeted in this case, which the SEC calls shadow trading, occurs when a corporate insider uses material, nonpublic information about their own company to trade in securities of another, comparable publicly traded company.
In light of the SEC’s enforcement activity in this area, public companies should consider updating their insider trading policies to address shadow trading. Private companies may want to consider adopting policies to address the practice as well.
First SEC Action
On April 5, a federal jury in California found Matthew Panuwat, the former head of business development at Medivation, Inc., liable under the novel theory of “shadow trading” in a civil enforcement action brought by the SEC. The jury made its decision in just several hours after an eight-day trial, which included testimony from Panuwat and several of his former colleagues.
Medivation, Inc. is a California-based mid-cap, oncology-focused biopharma company where Panuwat used to work. During his time at Medivation, Panuwat purchased stock options in another comparable oncology-focused biopharma company, Incyte Corp., allegedly because he believed Pfizer’s acquisition of Medivation would have beneficial collateral effects across that segment of the market and thereby increase Incyte’s stock price.
On Aug. 18, 2016, Medivation’s CEO emailed Panuwat and 12 other employees on a confidential basis to advise them that Pfizer was ready to sign a deal to acquire Medivation “this weekend” and disclosing the price at which Medivation would be acquired. Seven minutes after that email, Panuwat purchased call options in Incyte.
Once Pfizer’s acquisition of Medivation became public, Incyte’s stock price increased by roughly 8%, with Panuwat netting $107,066 in profit. In August 2021, the SEC brought charges against Panuwat, alleging he engaged in insider trading by purchasing call options in Incyte.
The verdict in Panuwat’s case provides a first glimpse of how juries and courts view the novel issues raised by shadow trading, including that an employee of one company can be found to have violated a legal duty when purchasing or selling securities of another company, and how closely correlated the stock prices of two companies need to be for a violation of law. Given the probability of appeals and potential for more enforcement actions, further legal developments are likely.
Update Policies
Public company insider trading policies often restrict trading in companies with which a company has dealings, and may go so far as to restrict trading in competitors or other key third parties. Medivation’s insider trading policy extended beyond Medivation stock to cover the securities of “all significant collaborators, customers, partners, suppliers or competitors.” Broad trading prohibitions like these recognize that corporate insiders may access material, non-public information relevant to the market value of other companies, and that could place the insiders at an informational advantage to the market as a whole.
Yet even such expansive language may not be enough, on its own, to create a legal duty for an insider to refrain from trading. In Panuwat’s case, the court found at least some disputes of material fact over whether Medivation’s policy prohibited trades like Panuwat’s purchase of call options in Incyte such that those purchases should be considered insider trading.
In light of the potential for shadow trading claims against officers and directors, and as law in this area evolves, public companies should consider updating insider trading policies to make clear the trading activities that are or aren’t permitted, and the companies whose securities may be subject to trading restriction.
Using generic categories in insider trading policies such as “customers” or “competitors” provides breadth, but can lead to open questions about whether a particular company fits those definitions. Greater specificity, including a list of specific key other companies, when known, helps provide clarity to corporate insiders and reduces reliance on interpretation.
Private Companies Too
Most private companies don’t have policies addressing insider trading since purchases and sales of company stock is more cumbersome than trading on the open market (and, in many instances, restricted until a public offering or liquidation event). However, an individual need not be an employee of a public company to engage in shadow trading since the concept applies to trading in another company’s stock.
As Panuwat’s case illustrates, for life science companies there are often reasons to believe that information about one company, public or private, might have implications for another public company’s stock. For instance, if a private company and public company are both developing drugs that target the same biological pathway, and the private company obtains positive clinical data, it might be possible to infer that the public company program will also succeed.
To prevent employees from using non-public information for their own benefit, a private company may find it prudent to assess its current employee confidentiality agreements or other policies to address shadow trading.
The case is Securities and Exchange Commission v. Panuwat, N.D. Cal., No. 21-cv-06322, verdict 4/5/24.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Stephen Thau is co-chair of the life sciences group at Orrick and a partner in the firm’s technology companies group.
Paul F. Rugani is a partner and leader of Orrick’s securities litigation practice group.
Nina Ganti is a litigation associate at Orrick.
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