David Wilson is the Partner-in-Charge of the Washington, DC office of Thompson Hine LLP.

One of the knotty issues of insider trading law is determining when trading based on material nonpublic information (“MNPI”) becomes a violation of law. Not all trades based on MNPI are unlawful—it depends on how a trader obtained that information and their relationship with the person or entity from which they got it. Key to the analysis in these cases is whether there has been a breach of fiduciary duty somewhere in the chain of information that has led to the trade. In the simplest of cases, a company insider who owes a fiduciary duty to his company to safeguard and not trade on MNPI breaches that duty when he trades in shares of the company or trades in shares of a company his employer has targeted for a potential acquisition. If that insider tips off someone outside his company (an “outsider”), and the outsider trades, there may be risk of liability for both the insider and the outsider.

A recent case brought by the SEC, in which a federal court denied the defendant’s motion to dismiss, has revealed a novel insider theory that the SEC and the Department of Justice may pursue. In what has come to be called a “shadow” insider trading theory, the SEC has asserted that when a defendant has obtained MNPI from his employer and uses that information to trade in the stock of another, unrelated company in the same industry, that trader has violated insider trading law.

In the case, SEC v. Panuwat,1 the defendant worked in the business development group at Medivation, Inc., a mid-cap biopharmaceutical company. Medivation’s insider trading policy stated that employees may receive, during their employment, “important information that is not yet publicly disseminated . . . about the Company.  . . .  Because of your access to this information, you may be in a position to profit financially by buying or selling or in some other way dealing in the Company’s securities . . . or the securities of another publicly traded company, including all significant collaborators, customers, partners, suppliers, or competitors of the Company.  . . .  For anyone to use such information to gain personal benefit . . . is illegal.”

The SEC complaint alleges that in 2016 Medivation was considering strategic options that included acquiring other companies or being acquired, and Panuwat had access to this confidential information. On August 18, 2016, Medivation’s CEO sent a memo to Panuwat and others in the company indicating that Pfizer’s head of business development had expressed a significant interest in acquiring Medivation. Before Pfizer announced that acquisition publicly on August 22, 2016, Panuwat bought out-of-the-money call options in Incyte Corporation, a company that Panuwat had tracked as part of his job and one that he had referred to in presentations to investment bankers as a comparable company they might want to consider.

After Pfizer’s August 22 announcement, Medivation’s stock price jumped from $67.12 to $80.72, and the prices of other mid-cap biopharmaceutical companies (including Incyte’s) also saw their share prices rise. The result for Panuwat was an increase in the value of his Incyte position by $107,066. The SEC sued Panuwat, alleging violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 under the so-called “misappropriation theory” of insider trading jurisprudence, which forbids trading on MNPI in violation of a duty of confidentiality owed to the source of the information.

The typical misappropriation case arising out of an acquisition involves a trader who has taken a position in one of the parties to the acquisition itself. In such cases, it may be relatively easy to see that the trader based the position it took on the MNPI that an acquisition was going to be announced. In Panuwat, however, the defendant traded in the shares of a company that was not involved in the acquisition, apparently basing his decision to take a position in Incyte on the expectation that when Pfizer announced that it would buy Medivation, the shares of other similar companies were also likely to appreciate.

In moving to dismiss the SEC’s complaint, Panuwat argued that the allegations against him failed to satisfy the materiality, breach of duty, and scienter elements of an insider trading claim. On the materiality issue, he argued that the information about Medivation and Pfizer could not be material to his decision to take a position in Incyte because the information was not about Incyte. The court rejected this argument, reasoning that the information that companies in this relatively small sector might be subject to acquisition was of interest to investors and nothing in the statute or case law limited what could be deemed material to only information about the two companies involved in the transaction.

With respect to the duty element, Panuwat argued that there was no breach of Medivation’s insider trading policy because Incyte was not a collaborator, customer, partner, supplier or competitor of Medivation, he had not breached the duty outlined in Medivation’s insider trading policy. The court disagreed, citing the language in that policy that prohibited Panuwat from using confidential information to trade in the securities of “another publicly traded company.” Thus, the court reasoned, the policy imposed a duty on employees that covered trading in the securities of any public company using company MNPI.

Finally, Panuwat argued that the SEC had not adequately pled the scienter element because it alleged merely that he possessed the MNPI, not that he actually used the MNPI as a basis for his trade. The court brushed aside this argument, finding that use of the information could be reasonably inferred based on Panuwat trading in Incyte securities for the first time ever almost immediately after learning that the Medivation acquisition was imminent.

While it remains to be seen whether the SEC will ultimately prove its insider trading claims against Panuwat and the district court’s decision on the motion to dismiss is not binding in any other courts, it is reasonable to expect that the SEC will cite this case to urge that the concept of “shadow trading” be established as another way to establish insider trading liability.  So, what risks does this pose for employees of public companies and investment professionals?  Here are some takeaways:

  • Information may be material for purposes of an insider trading analysis even if it does not pertain to the operations or a potential transaction of that company. Companies should try to avoid defining their policies too narrowly and focus on broadening their compliance training structure to cover the Panuwat case in their training sessions.
  • Broad language in a company’s insider trading policy such as that stated in Medivation’s policy may broaden the risks of liability for an array of trades. We cannot know whether Panuwat would have prevailed on his motion to dismiss absent the “other public company” language in the policy, but the SEC and the court certainly focused on it.


  1. Securities and Exchange Commission v. Matthew Panuwat, No. 4:21-cv-06322 (N.D. Cal. Aug. 17, 2021).