The trial took eight days. The jury took two hours. On Friday, in the case of SEC v. Panuwat, the jury in a federal district court in California determined that Matthew Panuwat was civilly liable for insider trading under the misappropriation theory. This case dates back to August 2021, when the SEC filed a complaint in the U.S. District Court charging Panuwat, a former employee of Medivation Inc., an oncology-focused biopharma, with insider trading in advance of Medivation’s announcement that it would be acquired by a big pharma company, Pfizer.  As you know by now, this case has often been viewed as highly unusual:  Panuwat didn’t trade in shares of Medivation or shares of the acquiror, nor did he tip anyone about the transaction.  No, the SEC’s novel—but winning—theory of the case was that Panuwat engaged in “shadow trading,” using the information about the acquisition of his employer to purchase call options on Incyte Corporation, another biopharma that the SEC claimed was comparable to Medivation, based on an assumption that the acquisition of Medivation at a healthy premium would probably boost the share price of Incyte.  Panuwat made over $120,000 in profit.  According to a statement from the Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, “[a]s we’ve said all along, there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple. Defendant used highly confidential information about an impending announcement of the acquisition of biopharmaceutical company Medivation, Inc., the company where he worked, by Pfizer Inc. to trade ahead of the news for his own enrichment. Rather than buying the securities of Medivation, however, Panuwat used his employer’s confidential information to acquire a large stake in call options of another comparable public company, Incyte Corporation, whose share price increased materially on the important news.”

The SEC charged that Panuwat violated Rule 10b-5 and sought an injunction and civil penalties.  (See this PubCo post.)  After losing a motion to dismiss in September last year, Panuwat moved for summary judgment, claiming that this was the wrong case to test out the novel shadow-trading theory: “Incyte and Medivation were fundamentally different companies with no economic or business connection, Medivation’s policies did not prohibit Mr. Panuwat’s investment, and Mr. Panuwat’s reasons for making the investment were entirely separate from the Medivation sale process and consistent with his prior investment  practices.”  The SEC responded that Panuwat’s “actions fit squarely within the misappropriation theory of insider trading” and that his “actions provide strong evidence of his scienter.”  The District Court for the Northern District of California denied the summary judgment motion.  Notably, the court did not take issue with the SEC’s application of the shadow trading theory, instead treating the case as just another version of “misappropriation” of material nonpublic information; the court concluded that the SEC had “shown affirmative evidence sufficient to support a jury finding that Panuwat misappropriated MNPI.”  According to the court, the SEC showed that there were “genuine disputes of material fact concerning (i) whether Panuwat received nonpublic information, (ii) whether that information was material to Incyte, (iii) whether Panuwat breached his duty to Medivation by using its confidential information to personally benefit himself, and (iv) whether Panuwat acted with scienter.”  In its Order, the court reminded the parties to schedule a settlement conference. But ultimately, the case went to trial. (For more on the background of the case and the court’s analysis, see this PubCo post.)

Background

Based on the description in the court’s Order, from 2014 to 2017, Panuwat was employed in business development at Medivation, where he was  “responsible for finding, evaluating, and pursuing acquisition opportunities for Medivation,” a responsibility that involved “track[ing] developments in the biopharmaceutical industry.”   In connection with his employment, he signed the company’s Insider Trading Policy and Confidential Information and Invention Assignment Agreement. 

In March 2016, Medivation was approached with an unsolicited takeover offer from another company, which Medivation rejected.  But the other company continued its pursuit.  As a result, Medivation’s board directed its investment bankers to explore strategic alternatives. As described in the Order, the analysis—both internal and external—resulting from that effort identified Incyte and Medivation as two of “the ‘very few’ midcap oncology assets” remaining in the industry at that time. There was also speculation by financial analysts about the impact of a Medivation acquisition on Incyte, which some viewed as likely positive.  Although the market was aware that Medivation was engaged in a sale process, the details were confidential. According to the Order, Panuwat was involved in the strategic alternative search and analysis and was “often privy to confidential details about the sale process.” At one point during the process, he indicated to one of the bankers that Incyte was a comparable company and was “first in class.”

On August 18, 2016, Medivation’s CEO sent Panuwat and 12 other employees an email with confidential information about Pfizer’s strong interest in a deal with Medivation, suggesting that a deal was imminent, including price terms. According to the Order, “[s]even minutes later, at 12:26 PM P.T., Panuwat started purchasing Incyte call options,” in amounts representing significant portions of the daily volume of those call options sold in the market.  On Monday, August 22, the deal was announced, and Incyte’s stock price rose 7.7%. Panuwat made over $120,000. Five years later, the SEC charged Panuwat with violation of Section 10(b) and Rule 10b-5.

At trial

The trial was covered in a series of interesting articles—highly recommended—in Law360, starting here, and continuing here, here, here, here, here, here and here, and summarized briefly below. In the opening statements, the articles report, the SEC’s attorney told the jury that when a company announces an acquisition, the announcement boosts not only the company’s stock price but also, “‘[t]ypically, the stock prices of other similar companies go up too—and sophisticated traders know that….[Panuwat] made $120,000 and the evidence is going to show that the defendant knew exactly what he was doing.’” The SEC’s attorney added that “he also knew that he wasn’t supposed to use Medivation’s confidential information for his own profit.” The SEC’s attorney told the jury that “Panuwat had been keeping an eye on Incyte’s stock and value…but had not traded in the rival company until the Pfizer deal was imminent.” Then, the SEC’s attorney added, Panuwat “‘put $117,000 on the line, about half his annual salary….The defendant’s Incyte trade was almost five times larger than any of his previous options trades.’” 

Panuwat’s attorney, according to the articles, contended that his client was the victim of a false narrative constructed by the SEC. He recognized that it all sounded suspicious, but told the jury that the evidence would show otherwise:  “‘The SEC does not have a single witness with first-hand personal knowledge about why Mr. Panuwat made his trades in the Incyte company.’” In addition, he said, Panuwat “‘was not aware…that trading in the securities of an entity that was not your employer and that had no business relationship with your employer could ever be deemed to be a violation of the securities laws.”  Plus, much of the information about the bidding process for Medivation was already public information. In addition, Panuwat’s attorney said, the evidence would show that Medivation and Incyte were not competitors. Rather, Panuwat had been following Incyte after reading an analyst’s report “that recommended customers buy Incyte call options before the company’s next earnings report…. Panuwat later made trades in Incyte because he believed the stock was undervalued and saw a buying opportunity.” In addition, he told the jury that the SEC had “‘no evidence that Mr. Panuwat even saw the email’ from Medivation’s CEO,… later adding, ‘The SEC cannot prove a link between that email and the reasons for Mr. Panuwat’s trades. It’s their burden to do that.’”

The witnesses in the trial, the articles report, included an investment banker engaged by Medivation in connection with its 2016 sale. He testified that, in the bank’s analysis, Incyte was viewed to be among Medivation’s peers in that  both “companies had ‘similar characteristics, similar revenue scale, similar lines of business, similar trading values.’”  The banker said that he was quite confident that a deal would be reached, although, under questioning from Panuwat’s counsel, he testified that deals do sometimes crater. The SEC’s deputy chief economist and deputy director of its Division of Economic and Risk Analysis next testified that the announcement of the sale of Medivation “would have an expected positive ‘spillover effect’ on rival Incyte’s stock price.” And Incyte’s price did increase by 7.7%. She told the jury that “she did an analysis to determine what caused Incyte’s stock movement on that day. ‘What I found was that it was not caused by normal fluctuations, it was too big for that….And I was able to draw that conclusion at a 99% confidence level.’” Panuwat’s attorney questioned her neutrality on this issue, given that her work “is always for the SEC, never the defense.”

The SEC also played for the jury video-recorded deposition testimony from Panuwat, the articles report, in which he “said he couldn’t recall why he purchased the securities just minutes after learning Pfizer was close to acquiring his own company.” He also said that he followed movement of stocks in the oncology space and that he understood the bid for Medivation to be confidential. With regard to his purchase of Incyte options, he said that he couldn’t recall any specific event that would have triggered his purchase and that he didn’t recall “‘discussing Incyte with anyone around that time.’”  “‘Nothing in particular stands out whether I did and didn’t,’” Panuwat said in the recorded testimony. 

One of Panuwat’s co-workers testified for the defense, maintaining that “the two companies weren’t competitors and that he wouldn’t expect their stock prices to rise in tandem.” He described differences between the two companies and concluded that the bankers’ analysis “didn’t provide a complete picture.”  He also didn’t see that stock prices of other companies in the biotech space rose when another company was acquired. Another witness for the defense, an expert on call options, testified that Panuwat was an experienced trader and that that his “Incyte purchases would not have been risky without inside information, as alleged by the SEC.”

The articles also report on Panuwat’s testimony at trial.  He testified that he didn’t rely on confidential information in his decision to buy Incyte options and that “he didn’t think even ‘for one second’ that he was violating securities laws.” Panuwat also said that he didn’t view Incyte and Medivation as competitors, given that they focus on different diseases and that Incyte is much larger than Medivation. He further testified that his decision to invest in Incyte was triggered by an analyst’s report recommending the purchase of Incyte call options. At that point, he began to watch Incyte stock prices, which were falling, for reasons he found “‘hard to explain.’” He testified that he invested such a substantial amount because he had made profitable trades earlier in the year “and was looking to reinvest to minimize his tax bill on those gains.”

In cross-exam, the articles report, the SEC’s attorney asked him why he had not provided those justifications—such as his tax strategy—to investigators when he was first questioned in 2020. He responded that he “believed that he had told the SEC that he felt the stock price was undervalued” and that, when he spoke with investigators, four years had passed since the trades occurred. In his cross-exam, the SEC’s attorney repeatedly described various facts and events and asked whether they were all just “coincidence.”   According to the articles, the SEC’s attorney asked “‘[i]t’s your testimony that you would have made exactly the same trades at exactly the same time, even if you didn’t have any information about the Medivation deal,’” which Panuwat confirmed. “‘So it’s just a coincidence,’” he asked “‘that you happened to make those trades seven minutes after you got the email from Dr. Hung.’” The SEC’s attorney went though a number of these events that he characterized, incredulously, as “just coincidence”: the timing of Panuwat’s trades, his history of investing in other stocks and his decision to make his largest investment ever in Incyte (a stock that he had never previously traded), his failure to discuss his trade with colleagues, the sudden boost in Incyte’s stock price and the timing of his sales. Although Panuwat agreed to many of the facts recited, he added that “‘[i]f you’re implying that coincidence means that these events are somehow related. And I would have to disagree with you.’” Panuwat said that “he had based his trade in Incyte solely on information about that company.” 

In closing arguments, as described in the articles, the SEC’s attorney contended that Panuwat’s testimony “‘ignores coincidence after coincidence and requires you to check your common sense at the door.’”  Panuwat’s attorney argued that the whole case was just an SEC construct: “‘We have seen how one of the most powerful agencies of the United States government reverse-engineered a case against my client,’” he said.  But it was to no avail. After two hours of deliberation, based on a preponderance of the evidence, the jury found Panuwat liable.

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