August 18, 2021

Insider Trading: Misappropriation Case!

Yesterday, the SEC announced insider trading charges against the former head of biz dev at a mid-cap company that was acquired at a premium 5 years ago. The guy was smart enough to not trade in securities of the target company that employed him. Instead, he bought out-of-the-money options in a competitor that was cited by bankers on the deal as a “comparable company” – allegedly based on the confidential info about the deal, and allegedly because he (correctly) assumed that the competitor’s stock price would go up when the deal was announced.

There are some unique facts here, but in insider trading lingo, trading based on confidential info from an employer looks a lot like “misappropriation” – which the Supreme Court upheld as a theory of liability in 1997, in United States v. O’Hagan, and which is reflected in the language of Rules 10b5-1 and 10b5-2. And sure enough, that seems to be how the SEC is positioning the case. Here’s an excerpt from yesterday’s SEC complaint:

– On August 18, 2016, and in the course of Panuwat’s employment at Medivation, Panuwat received confidential, nonpublic information in an email from Medivation’s Chief Executive Officer (“CEO”) that Medivation would be imminently acquired by pharmaceutical giant Pfizer, Inc. (“Pfizer”).

– As an employee and agent of Medivation, Panuwat owed Medivation a duty of trust and confidence, including a duty to refrain from using Medivation’s proprietary information for his own personal gain.

– Nonetheless, within minutes of receiving this highly confidential news from Medivation’s CEO, Panuwat misappropriated Medivation’s confidential information by purchasing—from his work computer—out-of-the-money, short-term stock options in Incyte Corporation (“Incyte”), another mid-cap oncology-focused biopharmaceutical company whose value he anticipated would materially increase when the Medivation acquisition announcement became public. Panuwat did not inform anyone at Medivation about his Incyte trades.

The twist in this case is that the info wasn’t directly about the company whose securities were traded. That competitor company wasn’t part of the deal, but the SEC is claiming that the biz dev guy used material non-public info about the deal to guess what would happen to that other company’s stock when the deal was announced. People who are smarter and more familiar with insider trading case law than me probably have opinions on whether this is an open & shut case – so please email me if you know of some precedent! But for the moment I’m not making assumptions about how the court will come down on this. At any rate, though, the trade seems to have violated the company’s insider trading policy. Here’s what that document said, according to the complaint:

“During the course of your employment…with the Company, 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.)

Sometimes when you’re reviewing an insider trading policy, the client asks whether it’s really necessary to include the part about prohibiting transactions in the securities of other companies. These charges are a reminder that it is – because it shows the company is doing its part to prevent transactions that could be illegal, and hopefully it keeps your employees out of hot water too.

If you need to drive the point home, you also now have a brand new case to use as a scare tactic in your compliance trainings. The guy’s profits were only $107k, the company in question wasn’t part of the actual deal, and yet this activity still came to the attention of the Enforcement folks. They’re seeking penalties and a D&O bar – and defense costs probably aren’t cheap.

Liz Dunshee