Jury’s Endorsement of Shadow Trading Liability Should Prompt Businesses to Review Insider-Trading Policies

In August of 2021, the U.S. Securities and Exchange Commission (“SEC”) sued Panuwat alleging insider trading in violation of Section 10(b) of the Exchange Act. The undisputed facts showed that with inside knowledge of an impending acquisition of the company for which he worked, Medivation, by Pfizer, Panuwat purchased call options for another company, Incyte, that, like Medivation, was in the cancer drug development business.  He later made a profit from these options.  In response to the SEC’s charges, Panuwat argued that since the information he received was not about Incyte, his trading activity did not violate the law.  In denying Panuwat’s motion for summary judgment, the court accepted the SEC’s argument that “information regarding business decisions by a supplier, a purchaser, or a peer can have an impact on a company” and therefore be material.  The court thus endorsed the arguably novel “shadow trading” theory of Section 10(b) liability.  The court further held that Panuwat owed a duty to Medivation because of his senior position within the company and relied specifically on the fact that he had signed the company’s insider trading policy which addressed trading both Medivation stock and the stock of other companies.  At trial, the jury agreed. 

The SEC’s case essentially came down to a single email demonstrating that Panuwat was part of a small group of insiders who learned of the acquisition, as well as his purchase of options in Incyte eight minutes after opening the email.  The SEC’s case also depended on showing that Panuwat breached his employer’s insider trading policy, which critically prohibited trading based on material non-public information in any public company, not just Medivation.

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