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Out from the Shadows: The SEC Succeeds on Shadow Insider Trading Theory

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The Securities and Exchange Commission obtained a victory in a closely-watched trial when a jury found Matthew Panuwat liable for insider trading based on a “shadow trading” theory.  The jury’s verdict, as well as increased SEC enforcement under this theory, requires a re-examination of trading behavior and policies when one learns material nonpublic information about another company in the course of employment.

SEC Secures Victory in Panuwat Case

The Securities and Exchange Commission (“SEC”) caught the attention of the corporate and investment world in August 2021 when it filed an insider trading action against biopharmaceutical company employee Matthew Panuwat based on a “shadow trading” theory. In its complaint, the SEC alleged that Mr. Panuwat learned in the course of his employment that Mr. Panuwat’s employer—the biopharmaceutical company Medivation, Inc.—was to be acquired by Pfizer, Inc., as well as the anticipated purchase price for the transaction. Before the acquisition was publicly announced, Mr. Panuwat purchased out-of-the-money, short-term stock options in another biopharmaceutical company (Incyte Corporation (“Incyte”)) on the theory that the similarly-situated entity’s value would increase upon announcement of his company’s acquisition. The SEC claimed that Mr. Panuwat, by trading in Incyte securities ahead of the Medivation announcement, obtained illicit profits of $107,066.

The SEC’s “shadow trading” theory survived a motion to dismiss in which Mr. Panuwat argued that the SEC was “improperly expand[ing] existing insider trading law to punish innocent conduct without a valid legal basis.” In allowing the case to continue, the court noted, among other things, that Mr. Panuwat’s actions were in direct violation of Medivation’s employee policies, which define insider trading as using information learned in the course of employment to buy or sell stock in any publicly traded company. The SEC later defeated Mr. Panuwat’s summary judgment motion. The court held, among other things, that the SEC had put forward sufficient evidence that Mr. Panuwat’s trades in Incyte were in breach of duties owed to Medivation based on: (1) Medivation’s insider trading policy, (2) a confidentiality agreement Mr. Panuwat signed with Medivation, and (3) traditional principles of agency law arising because Medivation entrusted Mr. Panuwat with confidential information.

The case went to trial on April 5, 2024, and lasted eight days. At trial, the SEC presented evidence that Mr. Panuwat began purchasing Incyte call options seven minutes after receiving an email from Medivation’s CEO stating that the Medivation acquisition was imminent, identifying the acquirer, and stating the price. The SEC also demonstrated that the purchases constituted the largest trade Mr. Panuwat had made. At trial, Mr. Panuwat claimed that he chose to invest in Incyte, not because of the CEO’s email, but based on a then-recent analyst report recommending the purchase of Incyte call options. In a prior deposition, Mr. Panuwat had stated that he did not remember why he decided to trade Incyte securities. The SEC and Mr. Panuwat also presented competing testimony on whether Medivation’s acquisition was likely to materially affect Incyte’s stock price. The jury took only two hours to find that the SEC had established by a preponderance of the evidence that Mr. Panuwat was liable for insider trading.

Following the judgment, the SEC remains firm in its messaging that its insider trading charge in the case was not novel, but was rather an ordinary application of the longstanding “misappropriation theory” of insider trading. Mr. Panuwat’s conduct, the SEC stated, “was insider trading, pure and simple.” It is not yet clear whether the outcome in Panuwat will be appealed. If so, it will be interesting to see whether the U.S. Court of Appeals for the Ninth Circuit reaches a different determination on the validity of shadow insider trading theory under federal securities law.

SEC Sees Continued Success on Shadow Trading Theory in Recent Settlement

In the meanwhile, the SEC continues to investigate and press shadow trading cases. The SEC recently announced settled charges against Andreas “Andy” Bechtolsheim, the founder and Chief Architect of Silicon Valley-based technology company Arista Networks. According to the SEC’s complaint, Mr. Bechtolsheim misappropriated material nonpublic information regarding the impending acquisition of Acacia Communications, Inc. (“Acacia”) after learning of the acquisition through Arista’s relationship with another multinational technology company. The other company was allegedly considering acquiring Acacia and consulted with Mr. Bechtolsheim concerning the potential acquisition. Mr. Bechtolsheim traded Acacia options, the SEC alleges, through the accounts of a close relative and associate. In its complaint, the SEC noted that Arista Network’s insider trading policy specifically prohibited the misuse of any nonpublic information of other companies and provided that nonpublic information acquired in the course of employment with the company could be used only for legitimate business purposes. Once the acquisition was announced, Acacia saw its stock price increase 35.1%, yielding Mr. Bechtolsheim more than $415,000 in illicit profits, the SEC alleged. To settle the SEC’s charges, Mr. Bechtolsheim agreed to pay a civil penalty of nearly $1 million.


Panuwat and Bechtolsheim show that both the SEC and at least some courts are taking a broader view of insider trading violations and enforcement as well as the sources of duties that may underlie alleged violations. While these cases tend to be highly fact-specific, traders and their advisors should consider the extent to which material nonpublic information learned in the course of one’s employment might be material, not just to the employer, but to other public companies (regardless of whether the other company does business with the employer or competes with the employer). Moreover, companies should review their insider trading policies, confidentiality agreements, and training processes and materials in light of the SEC’s increasing focus on the “shadow trading” theory and the importance of the wording of employer policies in both Panuwat and the Bechtolsheim Complaint. Depending on a company’s industry and particular circumstances, changes to the scope of prohibited conduct may be appropriate, particularly with respect to transactions in securities of other companies. When considering policy changes, companies should keep in mind the SEC’s focus on issuer compliance programs and indications that issuers foster compliance within their organizations. Because this is a developing area of the law, companies may wish to increase the frequency with which they review and train on their insider trading policies to account for new developments and to keep employees and business advisors apprised of these matters.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.