On September 9, 2024, the United States District Court for the Northern District of California denied defendant Matthew Panuwat’s motions for a new trial and judgment as a matter of law, while largely granting the U.S. Securities and Exchange Commission’s remedies in SEC v. Panuwat, No. 3:21-cv-06322 (N.D. Cal.). In Panuwat, the SEC’s novel “shadow trading” case, the SEC brought a civil enforcement action against Mr. Panuwat, a former corporate development executive at the biopharmaceutical company, Medivation, for trades he made in the shares of a Medivation competitor, Incyte. With his order, Judge William H. Orrick foreclosed further challenges to the SEC’s first-ever “shadow trading” action—at least at the trial court level—and likely opened the door to similar future actions.
SEC Tried a Novel Insider Trading Theory Before a Jury and Won
In August 2021, the SEC sued Mr. Panuwat in a civil enforcement action for insider trading pursuant to Section 10(b) of the Exchange Act and SEC Rule 10b-5. It alleged that, when Mr. Panuwat was involved in Medivation’s efforts to fend off a takeover by soliciting bids from other life sciences companies, Mr. Panuwat learned material non-public information (“MNPI”) about Medivation. He then, hours later, purchased call options in Incyte Corporation, a Medivation competitor developing similar oncological drugs. Mr. Panuwat realized $120,031.32 in profits from his options trades in Incyte stock. This has been described as “shadow trading,” or trading in a different company’s stock with his own company’s MNPI, but with the understanding that MNPI would also increase the stock price of that other company. The SEC categorizes “shadow trading” as falling into the “misappropriation” category of the judicially-created forms of insider trading, which was first recognized by the Supreme Court in United States v. O’Hagan, 521 U.S. 642 (1997). This was the first time the SEC had brought an enforcement action under this fact pattern.
In January 2022, Judge Orrick denied Mr. Panuwat’s motion to dismiss. SEC v. Panuwat, 2022 WL 633306 (N.D. Cal. Jan. 14, 2022). Judge Orrick held that “Section 10(b) and Rule 10b-5 cast a wide net, prohibiting insider trading of any security using any manipulative or deceptive device.” Id. at *4 (internal citations omitted). The court later denied Mr. Panuwat’s summary judgment motion. SEC v. Panuwat, 702 F. Supp. 3d 883 (N.D. Cal. 2023). In his order, Judge Orrick found that the SEC had presented sufficient evidence to show that Mr. Panuwat had breached specific duties to Medivation by (i) making trades based upon Medivation’s MNPI and (ii) using Medivation’s confidential information for his own personal benefit. Id. at 899–900. After an eight-day trial, a jury found Mr. Panuwat liable under the SEC’s novel “shadow trading” misappropriation theory of insider trading. Following the jury verdict, Mr. Panuwat filed a motion for a new trial and a renewed motion for judgment as a matter of law.
Judge Orrick Upholds the Jury Verdict
On Monday, Judge Orrick affirmed the jury’s trial verdict, denying Mr. Panuwat’s motions. Judge Orrick held that “there was substantial evidence to support the jury’s finding” of insider trading liability. In denying Mr. Panuwat’s motions, Judge Orrick clarified that “shadow trading” is a form of insider trading based on the Supreme Court’s decision in O’Hagan. He disagreed with Mr. Panuwat’s contention that the court’s use of the phrase “insider trading” to describe the charges against Mr. Panuwat was manifestly unjust. Judge Orrick further held that it is “very apparent that the Court [in O’Hagan] considered the misappropriation” theory, and thus “shadow trading,” “to be an alternate theory of insider trading, to be contrasted with the ‘classical’ or ‘traditional’ theory of the same.”
Judge Orrick also granted two of the three remedies the SEC had sought. The Court entered final judgment ordering Mr. Panuwat to pay $321,197.40—three times Mr. Panuwat’s trading profit, the maximum civil penalty allowable under the Insider Trading Sanctions Act of 1984—and permanently enjoined Mr. Panuwat from future violations of securities laws. The Court did, however, decline to bar Mr. Panuwat from ever serving as an officer or director of a public company, as the SEC had also sought. Mr. Panuwat has yet to appeal. The United States Department of Justice (“DOJ”) did not pursue criminal charges alongside the SEC’s civil suit.
Takeaways
While Mr. Panuwat may appeal his case to the Ninth Circuit and beyond, the SEC’s victories on the law and facts of this case indicate that “shadow trading” is, at least for now, a new tool in its securities enforcement arsenal. While the SEC generally requires publicly traded companies to maintain and enforce insider trading policies, it does not specify what conduct those policies should proscribe. It is conceivable that some public companies will consider updating their policies to be more restrictive, and to prohibit explicitly conduct similar to Mr. Panuwat’s, even though in this case, liability only flowed to Mr. Panuwat himself and not to his employer. This, however, is not a straightforward decision: a company may choose not to prohibit such conduct, or elect to enumerate exactly the type of trades that would be prohibited. Companies that choose not to prohibit shadow trading in their policies should also consider carefully whether such prohibition (or its absence) is in the best interest of the company. Private plaintiffs may in the future focus on the exact language of insider trading policies in derivative actions. That is especially likely if the company is incorporated in Delaware, where the law with respect to the intersection of fiduciary duty and insider trading appears to be in flux.
The penalties that the SEC pursued in this case, combined with the SEC’s year-over-year uptick in enforcement actions, may indicate similar actions on the horizon. In the post-Chevron world, where the SEC can no longer seek monetary penalties via the agency’s own administrative proceedings, these and similar actions will be brought in federal courts, ensuring that the costs of defending and investigating such actions will be considerable both for defendants and for their employers. One can imagine, for example, renewed focus by D&O insurance providers on whether a company prohibits shadow trading. Such a company may see higher insurance premiums. Sensitizing employees to the risks involved remains a best practice, regardless of the merits and eventual outcome of an enforcement action.
