UPDATE: Shadow Trading Case Heads to Trial

Patterson Belknap Webb & Tyler LLP

Patterson Belknap Webb & Tyler LLP

In November 2023, in Issue Lines Drawn in SEC Shadow Trading Case, we revisited the case Securities and Exchange Commission v. Panuwat,[1] the SEC’s first enforcement action brought on the theory of “shadow trading.”

Shadow trading is a type of illegal insider trading in which material non-public information (“MNPI”) from one company is leveraged to execute a transaction in the securities of a second company whose share price is predictably correlated to the disclosure of the MNPI. [2]

After briefing from the parties and an amicus curiae brief submitted by Investors Choice Advocates Network (“ICAN”), the Court refused to grant a motion for summary judgement, [3] holding that triable issues remained.


While much of the Court’s decision addressed aspects specific to this action, the issue of whether MNPI regarding the sale of Medivation could be legally material to Incyte has been a focus of the action.

According to the SEC’s complaint, Panuwat was one of 13 Medivation employees who received an email from the Medivation CEO regarding a long-negotiated buy-out of the company by Pfizer Inc., and that “Seven minutes later … Panuwat started purchasing Incyte call options.” [4]

The Court found that the SEC had met its burden of demonstrating a triable issue of fact regarding materiality by several types of evidence:

  • Evidence of A Market Connection

The Court described the existence of a “market connection” between the Medivation and Incyte as “critical for materiality.” [5]

Despite the companies having different approved drugs treating different patients and no overlapping development efforts, the Court recognized that the SEC had introduced evidence of analyst reports linking the companies, including one report specifically identifying a possible Medivation merger as a reason for interest in Incyte stock. [6]

  • Evidence that Medivation and Incyte Were Comparable Peers

The SEC introduced evidence that investment bankers considered Incyte a “comparable peer” to Medivation because they were both “mid-sized, cancer-related drug companies with commercial product in a market where the scarcity of such companies played a large role in their value.” [7]

Because these companies both occupied the same “small pool,” the Court held that “a jury could find that a reasonable investor might understand information about one company's acquisition to ‘alter the total mix of information’ about the other.” [8]

  • Evidence of Changes in Stock Price

One of the most common methods of demonstrating materiality in actions arising under Section 10b has been to show: (1) public disclosure of an event, and (2) a prompt reaction in a company’s share price. Here, the SEC introduced evidence that Incyte’s share price increased by 7.7 percent upon the public disclosure of Pfizer’s acquisition of Medivation. [9]

Although Panuwat argued that Incyte’s share price had seen a one-day fluctuation of at least 7.7 percent on more than 400 occasions, the Court noted that a jury could reasonably find that the share price change was “further indication of the two companies’ connection in the market, and therefore probative of materiality.” [10]

ICAN’s amicus brief advanced the theory that insider trading prohibitions represent a trade-off between efficient markets and fairness and that the SEC’s shadow trading theory risks “creating numerous industry-wide and/or sector-wide trading blackout periods.” [11] The Court “did not find [ICAN’s] argument particularly persuasive,” [12] arguments based in part on the idea that “Trading on the basis of material nonpublic information will always push stock prices in the ‘correct’ direction.” [13]

The jury trial in Panuwat has been set to begin on March 25, 2024. [14]

The case is Securities and Exchange Commission v. Panuwat, Docket No. 3:21-cv-06322 (N.D. Cal. Aug 17, 2021).

[1] Secs. & Exchg. Comm’n v. Panuwat, Dkt No. 3:21-cv-06322 (N.D. Cal. Aug 17, 2021).

[2] See Shadow Trading, M. Mehta, D. Reeb & W. Zhao, Accounting Rev. (2021) 96 (4): 367-404.

[3] Secs. & Exchg. Comm’n v. Panuwat, No. 21-cv-06322-WHO, – F.Supp.3d –, 2023 WL 9375861 (N.D. Cal. Nov. 20, 2023).

[4] Id. at *3.

[5] Id. at *6.

[6] Id.

[7] Id. at 7.

[8] Id.

[9] Id.

[10] Id.

[11] Dkt. No. 81 at 7-8.

[12] Sec. & Exch. Comm'n v. Panuwat, No. 21-CV-06322-WHO, 2023 WL 9375861, at *3 n.4 (N.D. Cal. Nov. 20, 2023).

[13] Id. at 8 (citing Henry G. Manne, Insider Trading and Property Rights in New Information, 4 CATO J. 933, 935-36 (1985)).

[14] Pre-Trial Order, Dkt. No. 95 at 1.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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