SEC Secures Jury Verdict in Shadow Insider Trading Trial

On April 5, 2024, a federal jury in San Francisco returned a verdict in favor of the Securities and Exchange Commission (SEC) in Securities and Exchange Commission v. Panuwat.^[1]The jury found that a corporate executive had engaged in insider trading when he learned about an impending acquisition of his employer and then traded securities of an unrelated company in the same industry. This case presents significant questions regarding the reach of insider trading law and has serious implications for companies’ internal insider trading policies.

Litigation Background

The underlying proceeding dates back to 2021, when the SEC commenced an action alleging that Matthew Panuwat, a biopharmaceutical executive, learned that his employer, Medivation, was on the verge of announcing its acquisition by Pfizer and, based on that information, immediately bought call options in Incyte — a third pharmaceutical company in the same market as Medivation. The SEC alleged that Panuwat, who was entrusted with sensitive, nonpublic information because of his position, had good reason to know that the announcement of the Medivation acquisition would lead to a material increase in Incyte’s stock price. The SEC underscored that Incyte’s stock rose by 8% following the Medivation announcement and that Panuwat made just over $100,000 on his trades. To satisfy the insider trading law’s requirement that a defendant breached a duty, the SEC alleged that Medivation’s insider trading policy, which Panuwat had signed, prohibited employees from profiting from Medivation’s material nonpublic information by trading in Medivation securities or in the securities of “another publicly traded company.”

As we reported in our January 2022 alert, the district court denied Panuwat’s motion to dismiss, rejecting his arguments that the SEC failed to state a claim against him for insider trading and that allowing the case to proceed under this novel theory would violate his due process rights.^[2]In its decision, the court concluded that the SEC had sufficiently alleged that Panuwat “knowingly misappropriated confidential, material, and nonpublic information for securities trading purposes, in breach of a duty arising from a relationship of trust and confidence owed to the source of the information.” The court also rejected Panuwat’s due process arguments because the language of the statute and related regulations is broad and the allegations of materiality and scienter were compelling. The court acknowledged that “there appear to be no other cases where the material nonpublic information at issue involved a third party” — a fact the SEC conceded — but found this lack of precedent was not a basis to dismiss the complaint.

Summary Judgment Decision

In 2023, the district court denied Panuwat’s motion for summary judgment, rejecting the argument that the SEC could not satisfy all four elements of its insider trading claim.^[3]First, with respect to materiality, the court found that nonpublic information as to one company could be material to another company, provided that there was a sufficient “market connection” between the two companies. Considering the evidence presented at summary judgment, the court concluded that financial news and analysts’ reports repeatedly linked Medivation’s acquisition to Incyte’s future and that Incyte’s positive stock price reaction to the Medivation acquisition news was itself probative of the material market connection between the two companies.

Next, Panuwat argued that the internal Medivation email announcing the upcoming acquisition to employees was not nonpublic information because the market was well aware of the negotiations surrounding the potential acquisition. The court disagreed, finding that although an initial hostile takeover attempt of Medivation and a subsequent bidding process was publicly known, there were key “final details” — such as the final buyer, the final price and the timing of the acquisition — that were not publicly known and that constituted the nonpublic information.

With respect to Panuwat’s breach of the legal duty of confidentiality he owed to Medivation, the SEC advanced three different theories, and the court found triable issues as to each. First, the SEC argued that Panuwat’s trades violated the plain language of Medivation’s insider trading policy. The court determined that the language of the policy applied to the securities of “another publicly traded company,” and that subsequent language about “significant collaborators, customers, partners, suppliers, or competitors” merely provided a nonexhaustive list of examples of the types of companies that might be covered. Second, the SEC argued that Panuwat signed Medivation’s “Confidential Information and Invention Assignment Agreement,” which obligated him to hold confidential knowledge, data or other propriety information about Medivation’s business in “strictest confidence.” The court held that on its face, Panuwat’s personal trades based on nonpublic information regarding the upcoming acquisition could support a finding that Panuwat violated this agreement. Third, the SEC contended — and the court agreed — that traditional principles of agency law created another source of Panuwat’s duty not to use material information about Medivation for personal gain.

Finally, the court rejected Panuwat’s argument that there was no evidence that he traded with scienter because the acquisition had not been finalized at the time of his trades. The court found that a jury could conclude that Panuwat traded while in possession of material nonpublic information even if the acquisition was not final. The court also rejected Panuwat’s argument that there was no evidence that he actually used the nonpublic information rather than merely being exposed to it. While the court acknowledged an ongoing split within the Ninth Circuit as to whether “use” of nonpublic information is a separate requirement for insider trading liability,^[4]the court found that other evidence — such as the proximity in time between Panuwat’s receipt of the internal announcement and his trade — was probative evidence of scienter sufficient to survive summary judgment.

Trial

The case proceeded to an eight-day jury trial in March 2024. During the trial, both parties presented evidence regarding (1) Medivation and Incyte’s relationship in the market; (2) the confidentiality of the sale process within Medivation and Panuwat’s involvement in the sale process; (3) the proximity in time between Panuwat’s receipt of the acquisition news and his trades; (4) Incyte’s stock price performance after the acquisition was publicly announced; and (5) Panuwat’s execution of the trades. Notably, Panuwat testified that he would have made exactly the same trades at exactly the same time even if he had not received the email about the impending acquisition because a Goldman Sachs report recommended the purchase of Incyte call options. Panuwat also testified that he invested over $100,000 — the largest trade he had made until that time — in order to minimize taxes on trading gains he realized earlier in the year.

Panuwat also raised several objections to the court’s proposed jury instructions. First, Panuwat argued that (1) the SEC must prove Panuwat knowingly breached a fiduciary duty owed to Medivation; (2) the instructions improperly provided that nonpublic information becomes public only when it becomes “effectively disseminated” to the investing public; and (3) the court improperly excluded a “good faith defense” instruction. Panuwat sought leave to file an interlocutory appeal on these issues, which the court denied on the eve of trial.

After deliberating for approximately two hours, on April 5 the jury returned a verdict finding that Panuwat’s purchase of Incyte call options constituted insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Panuwat is expected to appeal the verdict.

Looking Ahead

Throughout the litigation and in its post-verdict statement, the SEC maintained that the case was not “novel” and was simply a traditional misappropriation theory insider trading case.^[5]Most commentators would disagree with that characterization, and would see the action as another example of the SEC pushing the limits of the insider trading laws through individual prosecutions in an area where there is no statutory definition of insider trading and much of the law is judge-made. The court’s decisions at the motion to dismiss and summary judgment stages raise significant questions about what constitutes a “sufficient market connection” between two companies giving rise to insider trading liability, and what role a company’s internal policies may play in determining the duties at issue and the scope of liability. The SEC’s success in Panuwat may encourage both the SEC and the Department of Justice to pursue more “shadow trading” cases, or more generally expand the parameters and reach of insider trading law to new fact patterns.

^[1]_{SEC v. Panuwat, No. 21-CV-6322 (N.D. Cal.).}

^[2]_{SEC v. Panuwat, No. 21-6322, 2022 WL 633306 (N.D. Cal. Jan. 14, 2022) (order denying motion to dismiss).}

^[3]_{SEC v. Panuwat, No. 21-CV-6322, 2023 WL 9375861 (N.D. Cal. Nov. 20, 2023) (order denying summary judgment).}

^[4]_{See, e.g., In re Countrywide Fin. Corp. Sec. Litig., 588 F. Supp. 2d 1132 (C.D. Cal. 2008); SEC v. Moshayedi, No. 12-CV-1179, 2013 WL 12172131 (C.D. Cal. Sept. 23, 2013).}

^[5]_{https://www.sec.gov/news/statement/grewal-statement-040524}