SEC Wins ‘Shadow Insider Trading’ Trial

On April 5, 2024, a jury in Federal Court in California found that the SEC established that Defendant Matthew Panuwat was liable under a civil misappropriation theory of insider trading violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Panuwat formerly worked at a biopharmaceutical firm, Medivation, and bought call options in the biopharmaceutical firm Incyte minutes after learning that Medivation was to be acquired at a significant premium. When the Medivation transaction was announced, Incyte’s stock price increased and Panuwat sold his Incyte investment at a significant profit.

Under the SEC’s civil misappropriation insider trading theory known as “shadow trading,” an individual may be liable for possessing insider information about a company and trading in shares of such company’s competitor.

In pursuing the case the SEC relied on Medivation’s Insider Trading Policy which prohibited trading in other public company securities to help establish Panuwat breached a duty of trust and confidence owed to Medivation.

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’s decision.

This case puts focus on the specific terms of a company’s insider trading policy to determine if an employee has breached a provision of the policy by engaging in shadow trading. We encourage companies to review the scope of their insider trading policy and be sure those subject to the policy are aware of its scope.

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