On January 14, 2022, the United States District Court for the Northern District of California issued a decision in SEC v. Matthew Panuwat[1] validating the legal theory advanced by the Commission that trading in the securities of a competitor company could form the basis of an insider trading violation where the defendant learned that an acquisition of his employer was imminent.  In denying the defendant’s motion to dismiss the complaint, the court ruled that the SEC had sufficiently pled a claim, marking the first judicial decision concerning alleged insider trading in securities of a company based on material, nonpublic information (“MNPI”) about another company, a practice that has sometimes been referred to as “shadow trading.”   The court’s refusal to dismiss the SEC’s novel legal theory that trading on the basis of MNPI of one company to profit on a securities transaction involving a competitor constitutes actionable insider trading should be considered by companies and individuals as they assess trading decisions and policies.

The Alleged Insider Trading

As alleged by the SEC, Panuwat was formerly a senior director of business development at Medivation, a mid-cap, oncology-focused biopharmaceutical company.  Over several months in 2016, Panuwat participated in discussions regarding a potential merger of Medivation with another company.  On August 18, 2016, Medivation’s CEO sent a confidential email to company executives, including Panuwat, announcing that an acquisition by Pfizer, Inc. was imminent.  Within minutes of receiving the email, Panuwat purchased call option contracts in Incyte Corp., a direct competitor of Medivation.  Panuwat had never purchased Incyte stock before.  Pfizer completed the acquisition of Medivation on August 20, and it was publicly announced two days later.  Upon the announcement, Medivation’s stock price climbed, as did the stock price of Incyte and its other competitors, apparently because the acquisition of Medivation made its competitors appear to be more attractive targets.  Panuwat earned $107,066 as a result of the stock increase.[2]

The SEC Action and Panuwat’s Motion to Dismiss

The SEC filed a complaint against Panuwat on August 17, 2021, alleging that Panuwat’s actions constituted insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b–5 thereunder, which broadly prohibit fraud or deception in connection with the purchase or sale of a security.[3]  The SEC based its claim on the “misappropriation theory” of insider trading, meaning that the SEC alleged that Panuwat “knowingly misappropriated confidential, material, and nonpublic information for securities trading purposes, in breach of a duty arising from a relationship of trust and confidence owed to the source of the information [his employer, Medivation].”[4]  Panuwat moved to dismiss the complaint, arguing that the SEC had failed to adequately plead that (i) the information at issue was material and nonpublic information about Incyte; (ii) Panuwat had breached a duty to Medivation; and (iii) Panuwat had acted with intent to defraud (known as “scienter”).  Panuwat also argued that the SEC’s novel application of the insider trading laws denied him due process.[5]

The Court’s Decision

The court denied Panuwat’s motion to dismiss, rejecting each of his arguments.  First, Panuwat argued that because his knowledge of the acquisition was not MNPI about Incyte, he could not be held liable for trading in Incyte’s securities.  The court disagreed, finding that the expansive language of the securities laws allows for information to be material to more than one company, and that the SEC had adequately pled that information regarding the acquisition of Medivation was material to its competitors (as demonstrated by the increase in Incyte’s stock price on the day the merger was announced).[6]  The court also found that the SEC had sufficiently alleged that Panuwat breached a duty to the source of the information (Medivation), reasoning that the company’s insider trading policy prohibited his alleged actions because it explicitly referenced trading in the securities of Medivation but also of other public companies, including competitors.[7]  The court also concluded that the SEC had adequately alleged that Panuwat acted with scienter, pointing to his alleged purchase of Incyte stock within minutes of receiving an email from Medivation’s CEO stating that a deal was imminent.[8]

The court similarly rejected Panuwat’s argument that the SEC’s application of the misappropriation theory of insider trading violated his due process rights.  Although the SEC had conceded that “there appear to be no other cases where the material nonpublic information at issue involved a third party,” the court concluded that the SEC’s theory fit within the expansive language of the securities laws.  Moreover, the court concluded that the requirements of alleging and proving materiality and scienter provide guardrails on the types of actions that the SEC can bring, and noted that the Supreme Court has stated that “[n]ovel or atypical methods should not provide immunity from the securities laws.”[9]


As the SEC recognized in its filings, this insider trading action is based on a novel fact pattern.  No other court has addressed so-called “shadow trading.”  Panuwat’s liability has of course not been established, and the court merely held that the SEC had adequately pled a violation of the securities laws.  However, market participants should take seriously (to the extent they have interpreted insider trading laws more narrowly) a court’s willingness to entertain this expansion of the SEC’s enforcement authority to extend to so-called “shadow trading.”  Thus, companies and individuals should take note of this decision in making trading decisions and in assessing insider trading policies.  Companies should consider whether, in light of this decision, their insider trading policies should expressly prohibit trading in the securities of competitors where MNPI about the company itself could impact those competitors’ securities.

Furthermore, because the facts in Panuwat were relatively straightforward—Panuwat was alleged to have traded in the securities of a direct and close competitor in a small market—it appears a logical test case for the SEC.  Other shadow trading fact patterns will likely have to grapple with more complicated determinations, including how material information about one company is for the value of securities of other companies in larger markets or less direct competitors (e.g., an insider at a company trading in the securities of a supplier or customer of the company).  Companies and individuals should be mindful of these often murky parameters in making trading decisions and reviewing trading policies.  Finally, it remains to be seen whether the Department of Justice will pursue criminal insider trading actions arising out of shadow trading, although the outcome of the Panuwat case will likely influence future decisions.

[1] Order Denying Mot. To Dismiss, ECF No. 26, No. 3:21-cv-6322-WHO (N.D. Cal. Jan. 14, 2022).

[2] Id. at 1–3, 8.

[3] See id. at 4 (citing 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b5).

[4] Id. at 5 (quoting SEC v. Talbot, 530 F.3d 1085, 1092 (9th Cir. 2008)).  This is in contrast to the “traditional” or “classical” theory of insider trading, wherein “a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information.”  Id. at 4–5 (quoting United States v. O’Hagan, 521 U.S. 642, 651–52 (1997)).

[5] Id. at 5.

[6] Id. at 5–8.

[7] Id. at 8–9.  The policy stated in part: “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.”  Id. at 1–2 (ellipses in original).

[8] Id. at 9–11.

[9] Id. at 11–13 (quoting Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 10 n.7 (1971)).