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‘Shadow Trading’ Verdict a Reminder for Companies to Review Insider Trading Policies and Train Insiders

David Kaufman Michele Kloeppel Eileen Duffy Robinett April 19, 2024

In a novel reading of the insider trading laws, the Securities and Exchange Commission (the “SEC”) recently prevailed in its case against an executive who traded in securities not of his employer, or of a customer or a direct competitor, but of a company in his employer’s industry, based on information he had learned about his employer.

On April 5, 2024, a jury in the United States District Court for the Northern District of California found Matthew Panuwat, a former executive at biopharmaceutical company Medivation, Inc., guilty of engaging in illegal insider trading of securities in another publicly traded pharmaceutical company after he learned about Medivation’s confidential plans to be acquired by Pfizer Inc. The other company, Incyte Corporation, was not a direct competitor of Medivation but was in the same mid-cap oncology-focused pharmaceutical industry.

The SEC alleged in part that, under the terms of Medivation’s insider trading policy, Panuwat was prohibited from using material nonpublic information learned during his employment with Medivation to trade in Medivation securities “or the securities of another publicly traded company.” Therefore, it claimed, he breached a duty to his employer, Medivation, when he purchased out-of-the-money call options related to Incyte almost immediately upon learning of the planned Medivation acquisition. The SEC also alleged violations of duties by Panuwat under the terms of a confidentiality agreement he had signed with Medivation and under common law duties of trust and confidence related to his employment relationship with Medivation.

The facts of the Panuwat case were unique in a number of ways. Those included stock market analysts’ previous citations in their publicly available reports of Incyte as a peer mid-cap oncology pharmaceutical company to Medivation, reference in investment banking analyses prepared for Medivation to both Incyte and Medivation as potentially valuable acquisition targets for large-cap pharmaceutical companies and the expected impact to each of the companies of any acquisition of the other company, citation of Incyte as a peer company to Medivation in merger analysis materials related to its acquisition by Pfizer, and the relatively small number of comparable public companies in Medivation’s industry sector. Panuwat has moved to overturn the verdict in this case, claiming that the SEC failed to show scienter. It is possible Panuwat may file further appeals.

Classic insider trading liability exists when a corporate insider trades in his company’s securities on the basis of material nonpublic information, because the use of the information to profit personally is considered a breach of duty owed by the insider to that company and its shareholders. This theory of insider trading liability has expanded over the years to cover those who “misappropriate” confidential information to trade in the securities of a company not through their positions as company insiders but in breach of a duty owed to another person. For example, a lawyer representing an acquiring company might use information he learned about a target acquisition to trade in the securities of the target company that he does not represent, thereby breaching a duty he owed to the acquiring company not to use its confidential information for personal benefit. The Panuwat verdict expands the misappropriation theory of insider trading liability to include trading in the securities of companies that are not directly involved in a specific transaction but are somehow “economically linked” to one of the companies involved in the confidential transaction.

The Panuwat case is a reminder to public companies, and their insiders, of the expansive duties owed by insiders regarding the use of confidential information learned in the course of their involvement with a public company. In the Panuwat case, the language of Medivation’s insider trading policy was broadly drafted to prohibit trading in “the securities of another publicly traded company, including all significant collaborators, customers, partners, suppliers or competitors” based on important nonpublic information related to Medivation. However, the SEC also relied on other duties (contractual and common law employment duties) deemed owed by Panuwat to Medivation in arguing that his use of confidential information learned during his employment for personal gain was a breach of duty to Medivation and sufficient to generate insider trading liability based on the misappropriation theory.

Public companies should review their existing insider trading policies in light of the Panuwat verdict to ensure they align with existing or expanded insider trading law. They may also want to remind and train their insiders about the scope of their insider trading policies as well as other possible duties insiders may owe to the company under other contracts or common law that, if breached, could result in insider trading liability.

If you have questions, feel free to contact David J. Kaufman, Michele C. Kloeppel or Eileen Duffy Robinett.