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Insider Trading Update: Out of the Shadows? - Recent decision approves of novel insider-trading theory.

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On January 14, 2022, a judge in the Northern District of California denied the defendant’s motion to dismiss in SEC v. Panuwat, a closely-watched insider-trading enforcement action. Panuwat has drawn the attention of many observers because the SEC has asserted a novel insider trading theory, specifically that the defendant obtained material, non-public information (“MNPI”) from his employer and then used that information to trade in the stock of another, unrelated company in the same industry. The motion-to-dismiss decision in Panuwat suggests this so-called “shadow” insider-trading theory has found acceptance with at least one district court judge and, more broadly, provides further evidence of a more aggressive SEC Enforcement Division.


The defendant worked as a senior director of business development at mid-cap biopharmaceutical company (“Company-1”). At the start of his employment, the defendant had signed Company-1’s insider trading policy, which provided:

During the course of your employment . . . you may receive important information that is not yet publicly disseminated . . . about the Company. . . . Because of your access to this information, you may be in a position to profit financially by buying or selling or in some other way dealing in the Company’s securities . . . or the securities of another publicly traded company, including all significant collaborators, customers, partners, suppliers, or competitors of the Company. . . . For anyone to use such information to gain personal benefit . . . is illegal

(emphasis added). As alleged by the SEC, in 2016, Company-1 was exploring various strategic options, including acquisitions of, or by, another company, and Panuwat had regular access to information regarding these discussions, which were confidential. Ultimately, on August 18, 2016, Company-1’s CEO sent certain executives, including Panuwat, a confidential email indicating that a large pharmaceutical company had expressed “overwhelming interest” in acquiring Company-1 (the “Acquisition”).

Within minutes of getting the CEO’s email, Panuwat bought call options in another midcap biopharmaceutical company (“Company-2), which was neither affiliated with Company-1 nor involved in the Acquisition. The SEC alleged, however, that in the months before the Acquisition, Panuwat had, as part of his job, closely tracked the stock price and product development pipelines of other mid-cap biopharmaceutical companies, including Company-2, and had, in presentations to investment bankers, “‘noted that they might want to consider [Company-2] a comparable company to’” Company-1.

On August 22, 2016, the Acquisition was publicly announced. Company-1’s stock jumped from $67.16 per share to $80.72, and Company-2’s stock, along with the stock prices of other mid-cap biopharmaceutical companies, also increased, raising the value of Panuwat’s Company-2 securities by $107,066.

Legal Analysis

The SEC brought an enforcement action against Panuwat under Section 10(b) of the Securities Exchange Act of 1934 (the “Section 10(b)”) and Rule 10b-5. Since the 1960s, the SEC, and the courts, have held that these provisions---which generally prohibit fraud and deceit in the purchase and sale of securities---reach (i) a corporate insider’s trading based on the corporation’s MNPI, given the insider’s fiduciary duties to shareholders (the “classical theory”) and (ii) any person’s trading on MNPI based on a duty of confidentiality owed to the source of the information (the “misappropriation theory”).

In Panuwat, the SEC proceeded under the misappropriation theory.

In denying Panuwat’s motion to dismiss, the Court, in fairly short order, found that the information regarding the Acquisition was “non-public” (given, among other things, numerous confidentiality markings on materials Panuwat received) and that Panuwat had a duty not to trade in the securities of Company-2 based on non-public information. On the latter point, the Court noted the insider trading policy Panuwat had signed at Company-1 explicitly banned trading in “the securities of another publicly traded company,” based on confidential information and for personal benefit. Because Company-2 was a publicly traded company, this standard was easily met.

The bulk of the Court’s analysis focused on whether the information regarding the Acquisition of Company-1 was “material,” to the stock of Company-2, such that Panuwat could plausibly be said to have traded based on “material, non-public information.” In finding that information about the Acquisition of Company-1 could plausibly be material to Company-2, the Court relied heavily on the broad language of Rule10b-5, which prohibits fraud and deception in the sale “any security” using “any manipulative or deceptive” device generally. More specifically, the Court also noted that “given the limited number of mid-cap, oncology-focused biopharmaceutical companies with commercial-stage drugs in 2016, the acquisition of one such company [Company-1] would make the others [including Company-2] more attractive, which would then drive up their stock price.” Further, the Court found it significant that a number of other companies had been interested in buying Company-1, and it was plausible that they would then turn their attention to Company-2 after being unsuccessful in acquiring Company-1. Finally, the Court noted that Company-2’s stock in fact increased after Company-1’s Acquisition was announced. Taking these factors together, the Court held that SEC had adequately pled materiality.

The Court also held the SEC had adequately pled Panuwat acted with scienter. The Court noted that Ninth Circuit caselaw was split on whether the SEC had to show the defendant actually used MNPI to execute a trade versus showing the defendant was simply aware of MNPI when trading. However, the Court concluded that the SEC’s complaint adequately pled even the more stringent “use” standard based on the circumstantial evidence. The Court cited the fact that Panuwat had known of the potential for the Acquisition for months but traded in Company-2 stock “within minutes” after learning the Acquisition was imminent, despite never having traded in Company-2 stock before.

Finally, the Court held that, despite the novel “shadow trading theory,” the SEC’s complaint complied with due process. The Court reasoned that, under Supreme Court precedent, a scienter requirement alleviates vagueness concerns and that, although novel, the SEC’s theory fit within the “general framework of insider trading, as well as the expansive language of Section 10(b) and corresponding regulations.”


  • As noted above, the critical issue in the case was materiality, and the SEC’s ability to frame Company-1 and Company-2 as two of a limited number of “mid-cap, oncology-focused biopharmaceutical companies” made it easier for the Court to find that information material to one was material to the other. It would be a closer case if, for example, Company-1 and Company-2 were in a less concentrated industry, or if Panuwat had purchased securities of a company connected in some way to Company-2 (e.g., a supplier) but not in the exact same, relatively narrow field.
  • Further, information about the Acquisition was certainly material to Company-1, conceivably making it easier for the Court to find it material to Company-2. Although not necessarily explicit in the Court’s decision, it seems logical, at least as a matter of optics if not law per se, this would also be a closer case if the information had been less important to Company-1.
  • The Court easily disposed of the question of whether Panuwat had breached a duty because Company-1’s insider-trading policy explicitly prohibited trading in “the securities of another publicly traded company . . . .” Issuers and others should ensure their training on insider-trading restrictions accurately reflects the company policies, including, among other things, the scope of restrictions on trading.
  • More broadly, the Complaint shows the SEC was willing to test an aggressive theory of insider trading. As also noted above, key to the Court’s decision was the broad language of Section 10(b) and Rule 10b-5, which prohibit “fraud” and deceit “in connection with the purchase or sale of any security,’” and the Court rejected concerns about due process by quoting Supreme Court case law that “novel or atypical methods should not provide immunity from the securities laws.’” As such, the decision reinforces the broad reach of the anti-fraud provisions of the securities laws, and issuers and others should consider making securities-law compliance training scenario or principles based, to ensure employees and others are trained to address and respond to the “novel and atypical” issues when they arise. This is particularly true in insider trading, because insider trading law is largely judge-made.
  • Relatedly, it bears noting that insider-trading enforcement has ebbed and flowed at times with judicial sentiment. See, for example, a series of prosecutions in the Southern District of New York in the late 2000s and early 2010s, a number of which were later reversed by the Second Circuit. The SEC’s success here may be a harbinger of more aggressive enforcement actions going forward.

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