Featured Expert Contributor, White Collar Crime and Corporate Compliance

Gregory A. Brower is a Shareholder with Brownstein Hyatt Farber Schreck, LLP. He also serves on WLF’s Legal Policy Advisory Board. Emily R. Garnett is a Shareholder practicing in the Denver, CO office of Brownstein Hyatt Farber Schreck, LLP and a former enforcement attorney at the U.S. Securities and Exchange Commission. 

On April 5, 2024, a federal jury in Northern California found Matthew Panuwat liable for insider trading. This case presents a novel offshoot from traditional insider trading cases and will be an important development for general counsels and compliance professionals to consider in the context of corporate insider trading policies.

Overview of the Panuwat Case

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.

How This Will Expand Insider Trading Cases

Traditionally, there are two types of insider trading cases: classic and misappropriation.  The classic theory may be familiar to many casual observers: Employee A learns in the course of her job of a strategic development that will affect her employer’s stock price, and she purchases or sells her employer’s securities based on that information.  Misappropriation theory goes one step further.  A trader learns of material nonpublic information from an improper source, such as an insider who tips the trader (so called tipper-tippee theory), or it could be that trader misappropriates or steals the information, such as a lawyer who learns of an upcoming merger, or an investment banker who underwrites a strategic transaction, and then trades based on that information.  Common across both theories is the understanding that the material non-public information relates to a company, and it is that company’s stock that is the subject of the security transaction.

With the Panuwat trial, the SEC expanded this theory and successfully argued that the use of the material nonpublic information can extend to trading decisions in other stock transactions, including competitors.  Nevertheless, the SEC has downplayed the novelty of this case. In the public statement following Panuwat’s conviction, Gurbir Grewal, Director of the Division of Enforcement, stated this is the sort of case the SEC has always brought, “As we’ve said all along, there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple.”

Indeed, the law does support this expanded theory.  Insider trading cases are charged as violations of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.  The elements of a Section 10b claim require proof of: (1) purchase or sale of a security; (2) by instruments of interstate commerce or the mails; (3) with scienter; (4) employing a device, scheme, or artifice to defraud; (5) making untrue statements of material fact or omitted; and (6) engaging in acts, practices, or course of business which operate as fraud or deceit.  There is no requirement that the material non-public information be related to the company whose securities are purchased.

Looking Forward:  Reviewing a Company’s Insider Trading Policies

 If we take this case and consider it more broadly, what was perhaps unique was the breath of Medivation’s insider trading policy, which stated the following:

“During the course of your employment…with the Company, you may receive 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. …”

While Panuwat is likely to appeal the verdict, companies should incorporate this language into their own policies.  Further, it seems relevant to note this case could foreshadow future criminal investigations related to this same theory.  As traders become more sophisticated in hiding their use of material nonpublic information to inform them of their securities transactions, we can anticipate regulators using their software to be able to identify competitor issuers who may have been the target of trading based on material non-public information.