Showcasing its shadow trading theory in a case of first impression, the U.S. Securities and Exchange Commission (SEC) secured a favorable verdict in a closely watched case. After hearing testimony over eight days of trial, a federal jury in California needed only two hours of deliberations to find a former executive liable for using material non-public information concerning his company to trade in the stock of another “similarly situated company,” the novel definition of shadow trading. Under a civil misappropriation theory of insider trading, the jury found by a preponderance of the evidence that Matthew Panuwat used inside information about the potential purchase of his company, Medivation, Inc., to trade in the stock of Incyte Corporation, another pharmaceutical maker of cancer treatments.
The SEC’s evidence included that Panuwat bought call options seven minutes after the Medivation CEO sent him an email detailing that Pfizer Inc., a top contender to acquire Medivation, was close to signing a deal. According to the SEC, Panuwat used that inside information to purchase call options in Incyte and, therefore, violated well-known insider trading laws. At this point, the first-of-its-kind verdict portends that the SEC will steadfastly continue to pursue shadow trading cases.
Whether shadow trading cases are here to stay is another question altogether, however, as Panuwat will likely appeal. Also, given that the SEC’s burden of proof was by a preponderance of the evidence, not a higher burden as with clear and convincing evidence or beyond a reasonable doubt, it is noteworthy that the U.S. Department of Justice sat this one out. The absence of a parallel criminal investigation of Panuwat’s trading by the DOJ suggested a wait and see approach so it could observe the SEC’s case and outcome. Post verdict, the DOJ may now be less willing to remain idle in cases involving shadow trading.
All companies, public and private alike, are on notice and would be well-served to supplement their insider trading policies to include cautionary guidelines and procedures on shadow trading.
