The SEC Secures Major Trial Victory in Its First 'Shadow Trading' Insider Trading Enforcement Action

• Published in: The Corporate Governance Advisor 2024-07, Vol.32 (4), p.22-24
• Main Authors: Barr, Jonathan R, Luevano, Maria S, Fokas, Jimmy
• Format: Article
• Language: English
• Subjects: Confidentiality; Enforcement; Evidence; Investments; Oncology; Put & call options; Scandals; Trials
• ISSN: 1067-6163

The complaint further alleged that Medivation's insider trading policy expressly forbade employees from using confidential information acquired at Medivation to trade in securities of any other publicly traded company8 In addition, Panuwat had signed a confidentiality agreement that did not allow him to use Medivation's confidential information for his personal benefit.9 Although Panuwat moved to dismiss the SEC's shadow trading action on several grounds, which he also pursued in a motion for summary judgment, the court denied these motions, ruling that the SEC's action fell "within the general framework of insider trading, and the expansive language of" the federal securities laws.10 A key issue in pretrial litigation and at trial was whether the information Panuwat received was material to Incyte. [...]the court relied on the following factors as evidence of the market connection between Medivation and Incyte: both companies operated in an industry where there were a small number of viable acquisition candidates; analyst reports and financial news articles reported at the time that acquisition interest in Medivation showed Incyte's attractiveness to investors; evidence put on by the SEC demonstrated that Medivation's investment bankers viewed the two companies as comparable peer companies; and, ultimately, that Incyte's stock price did in fact rise 7.7 percent after the Medivation deal was announced.12 In his defense, Panuwat offered evidence that Medivation and Incyte are not actually competitors and thus do not have a sufficient market connection under the shadow trading theory. During his testimony, Panuwat told jurors that he did not believe that trading in Incyte's stock violated securities laws and that he did not base his decision to buy the options on confidential information regarding the acquisition of Medivation.13 He also testified that at the time he purchased the call options, it was public knowledge that there were multiple potential bidders for Medivation.14 Prior to deliberations, U.S. District Judge William H. Orrick instructed the jury on the elements that the SEC had to prove, by a preponderance of the evidence, in order to establish liability.