On November 20, 2023, a federal district court denied summary judgment for the defendant in SEC v. Panuwat, a litigated enforcement action brought by the Securities and Exchange Commission (SEC) relating to so-called "shadow trading." Shadow trading involves an investor possessing material non-public information (MNPI) about "Company A" but trading in the securities of "Company B," another company with which Company A shares some form of close connection in the market. In this case, defendant Matthew Panuwat, in the course of his employment at a company called Medivation, allegedly learned that his company would be acquired, and seven minutes later began buying out-of-the-money, short-term call options in another company, Incyte. The SEC has alleged that Incyte was a closely comparable company to Medivation.
The SEC commenced this lawsuit in August 2021—on the last day of the applicable statute of limitations—and survived a motion to dismiss in January 2022. We reported previously on the filing of the lawsuit1 and the ruling on the motion to dismiss.2 Since its filing, Panuwat has been closely watched by market observers, including private fund managers and other institutional investors that commonly engage in expansive research into public companies and, at times, receive MNPI.
In denying the defendant's motion for summary judgment, the court further endorsed the novel foundation of the SEC's case: under certain circumstances, MNPI relating to one company can also be material to another company, even if the two companies do not have a direct business relationship. Accordingly, if a trader has a legal duty to keep the MNPI for the first company confidential, insider trading could occur based on trading in the securities of the second company. The court made a number of key rulings, including with respect to each element of insider trading—materiality, non-public information, legal duty and scienter—that will lay the groundwork for future "shadow trading" enforcement actions. Legal and compliance personnel should pay close attention to the takeaways from this litigation as they consider potential enhancements to their compliance programs and opportunities for training investment team members.
Panuwat is a former employee at Medivation, an oncology-focused biopharmaceutical company. In late March 2016, another pharmaceutical company attempted a hostile takeover of Medivation. Thereafter, Medivation launched its own sales process. As part of that process, Medivation insiders and outside analysts considered its relative position as compared to other biopharmaceutical companies and the impact that a Medivation acquisition would have on other similar biopharmaceutical companies, including—as relevant here—Incyte Corp. Although the market was aware that Medivation was looking to be acquired, the negotiations and sales process themselves were confidential, as were details about the sales price and the precise timing of the bid process. Panuwat was involved in the process and privy to these confidential details. As an employee of Medivation, Panuwat agreed to abide by the company's confidentiality agreement and insider trading policy, the latter of which contained language stating that he could not use the company's information to profit by trading in the securities of any public company.
On August 18, 2016, Medivation's CEO sent Panuwat and 12 other Medivation employees an email containing non-public information that a certain well-known large pharmaceutical company wanted to close a deal to acquire Medivation "this weekend." The email disclosed both the name of the acquiring pharmaceutical company and the anticipated price at which Medivation would be acquired. Seven minutes after the transmission of the email, Panuwat started purchasing call options for a different company, Incyte. The following Monday, Medivation announced the acquisition pre-market, and Incyte's stock price increased by nearly 8%. Panuwat then sold his Incyte options, making a profit of around $107,000.
The Court's Denial of Panuwat's Motion for Summary Judgment
In his motion for summary judgment, Panuwat argued that the SEC could not satisfy all four elements of its insider trading claim. The court rejected each of Panuwat's arguments.
In its order denying Panuwat's motion to dismiss, the court found that information may be material to more than one company and that information does not need to come from the issuer of the security to be material. In his summary judgment motion, Panuwat argued that the evidence adduced during discovery showed conclusively that the information about Medivation's potential acquisition did not "alter the total mix of information made available" to a reasonable investor in Incyte—i.e., the test of assessing the materiality of information for securities law purposes.3
The court reasoned that non-public information as to one company could be material to the other provided that a sufficient "market connection" between two companies exists. Considering the evidence it had before it at the summary judgment stage, the court held that the SEC had shown a reasonable investor could consider the CEO's email to be material to Incyte. The court pointed, principally, to analyst reports and financial news articles concluding that Incyte's value would be directly impacted by Medivation's acquisition. The court reached its conclusion regarding the "market connection" between Medivation and Incyte despite also finding as undisputed that the two companies had developed different drugs that treated different diseases.
Notably, the court highlighted Panuwat's own sophistication and experience trading in assessing materiality, noting that "a reasonable investor such as Panuwat—who paid careful attention to the biopharmaceuticalmarket, and specifically to Incyte—could have perceived Medivation and Incyte to be connected in the market such that pertinent information about one was material to the other."4
In addition to the foregoing, the court noted that Incyte's positive stock price reaction to the Medivation acquisition news itself constitutes probative evidence of materiality.
With respect to whether the element of non-public information, Panuwat first argued that the information in Medivation CEO's email—i.e., that the large pharmaceutical company wanted to close the acquisition over the weekend and the expected price of the deal—was not non-public information because the market was well aware of the negotiations surrounding the potential acquisition of Medivation. The court rejected this argument. It held that although the original hostile takeover attempt was publicly known and the subsequent bidding process—including the identity of potential bidders—had been publicized by journalists and analysts, there were key "final details" that were not publicly known.5It was these final details, according to the SEC, that constituted the non-public information.
Panuwat also argued that there was no evidence that he actually read the CEO's email. The court rejected this argument, too, pointing to numerous pieces of circumstantial evidence to find disputed issues of fact, including that Panuwat was sending and receiving other emails that day, that he did not have an out-of-office autoreply on that day and that he began trading seven minutes after the transmission of the email. The court held that while Panuwat was free to argue to a jury that the email in question did not contain any information beyond what the public already knew, and further that the SEC could not prove he even read the CEO's email.
The SEC advanced three different theories as to how Panuwat's trades breached the legal duty of confidentiality he owed to Medivation when he traded. The court found triable issues foreclosing summary judgment as to all three.
First, the SEC argued that Panuwat's trades violated the plain language of Medivation's insider trading policy. As with the motion to dismiss phase, the dispute at summary judgment turned on whether the insider trading policy applied to trades in issuers, like Incyte, that did not have business relationships with Medivation. In its order on the motion to dismiss, the court concluded that the language in the insider trading policy, on its face, applied to the securities of "another publicly traded company," and the court found the subsequent language about "significant collaborators, customers, partners, suppliers, or competitors" merely provided a non-exhaustive list of examples of the types of companies that might be covered.6
Second, the SEC argued that Panuwat signed Medivation's "Confidential Information and Invention Assignment Agreement," which obligated him to "hold in strictest confidence, and not use, except for the benefit of [Medivation] . . . confidential knowledge, data, or other proprietary information relating to . . . any business of [Medivation]."7 The court held that, on its face, the use of the non-public information regarding the anticipated Medivation acquisition for a personal trade violated the terms of this agreement.
Third, the SEC pointed to a duty owed by Panuwat to Medivation not arising from any document or agreement, but instead from a duty rooted in traditional principles of agency law. The court agreed that agency law created yet another source of a duty not to use the material information for personal gain. This finding is particularly significant because it suggests that a sufficient duty could exist to support "shadow trading" allegations regardless of whether the operative insider trading policy or agreement specifically references trading in the securities of "other companies."
Finally, Panuwat argued that there was no evidence that he traded with scienter. In an argument bearing some similarity to his argument regarding whether the email he received contained "non-public" information, Panuwat argued that acquisition of Medivation had not been finalized at the time of his trades. The court quickly dispensed with this argument, finding that a jury could conclude that Panuwat traded while in possession of MNPI even if the acquisition was not final.
Panuwat also reasserted his argument from the motion to dismiss that there was no evidence he actually used the MNPI, as opposed to only being exposed to it. While the court recognized an ongoing split in the 9th Circuit as to whether "use" of non-public information is a separate requirement, the court again concluded that there were triable issues of fact even if it resolved that legal question in Panuwat's favor. Specifically, the court held that the proximity in time between Panuwat's receipt of the email and his trades (seven minutes) was alone probative evidence of scienter sufficient to survive summary judgment. The court also pointed to Panuwat's trading history, observing that Panuwat rarely purchased out-of-the-money call options like those at issue here.
The court's order lends further support to the SEC's theory of "shadow trading," and provides the first look into how a court, on a well-developed factual record, will navigate the novel theory. While the decision does not mean the SEC will ultimately be able to prove its case, it is meaningful that the court has removed all legal obstacles for the agency to present its case to a jury.
In our prior client alerts—both in connection with the filing of the case and the motion to dismiss denial—we identified several steps, which we continue to recommend private fund managers consider taking in response to the Panuwat case. Below is some additional guidance based on the court's recent decision:
- We previously advised legal and compliance professionals to keep "shadow trading" front of mind when determining which issuers to add to their firms' restricted lists. The court's summary judgment order provides further clarity on when two companies share a sufficient "market connection" such that material information about one could be material to the other. Legal and compliance professionals should be on the lookout for these connections beforehand, and potentially consider restricting not only the company whose material non-public information is learned, but also any potential other companies with a "market connection."
- Irrespective of how the Panuwat case is resolved, legal and compliance officers should consider including this case in training on handling MNPI and making the point that "Panuwat-ish" fact patterns should be brought to the legal and compliance department for review.
- We previously noted that the language in confidentiality agreements and insider trading policies matter, and the summary judgment motion has borne that out. Specifically, the court flatly rejected Panuwat's efforts to point to management's understanding of the insider trading policy's scope, instead primarily relying on the plain language of the policy. At the same time, the court also referenced a potential alternate source of a duty of confidentiality, arising from common-law agency principles. This suggests that, while important, insider trading policy language may not be dispositive in all cases (which reinforces the suggestions in the immediately preceding two points).
While the summary judgment order is a blow to Panuwat, he still has an opportunity to defend the case at trial. Panuwat will therefore continue to be a case to watch for legal and compliance professionals in the private funds industry.
3 See Summary Judgment Order at 7 (citing Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)).
4 Id. at 4.
5 Id. at 14.
6 Id. at 16.
7 Id. at 18.
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