TheCorporateCounsel.net

The SEC’s novel “shadow trading” case has been creeping forward for a couple of years now. When I blogged about it in 2021, I called out an article about the theory that was co-authored by Joe Bankman, who is now famous for other reasons. Anyway, the Commission cleared another hurdle last week, when a California district court dismissed the defendant’s motion for summary judgment. This Proskauer blog reminds us why the litigation matters:

The Panuwat decision does not appear to break new ground under the misappropriation theory of insider trading in light of the particular facts alleged. But the “shadow trading” theory warrants attention because it can potentially have wide-ranging ramifications for traders by broadening the scope of the types of nonpublic information that might be deemed material.

Absent an intervening settlement, the case will go to a jury trial, where regular folks will hear the facts about misappropriation, breach of duty, and scienter. The Proskauer blog goes on to explain why the unique facts of this case may have affected the court’s decision to let it move forward:

For example, the materiality analysis depended on evidence that (i) the third-party issuer (Incyte) was one of only a limited number of companies in the acquisition target’s business and financial space; (ii) the third party had been specifically cited as a company that could be affected by the acquisition target’s transaction; and (iii) the trader had been directly involved in the underlying corporate discussions and presentations concerning the employer’s sale. Changing these variables could conceivably produce different results. At what point does “a limited number” of comparable companies become too big a number for information about Company A to be material to Company B (or C, D, or E)? How comparable do Companies A and B need to be? Would the court have reached a different conclusion if analysts and insiders had not mentioned Incyte as a comparable company, or if Panuwat had not been aware of those references?

The summary judgment decision does potentially change – and perhaps expand – the scope of the court’s prior analysis of the breach-of-duty element of insider trading. When the motion to dismiss was decided, many commentators focused on the fact that Medivation’s insider-trading policy had expressly covered “the securities of another publicly-traded company” (apart from Medivation itself), and they speculated on whether the absence of such language might have produced a different result. The summary judgment decision suggests otherwise. The court has now held that, even apart from the Insider Trading Policy and the Confidentiality Agreement, Panuwat had a duty to his employer under “traditional principles of agency law” not to use his employer’s confidential information “for his own personal benefit without disclosing that fact to [the employer].” That duty does not depend on the breadth of the Insider Trading Policy.

The blog says it’s still worth understanding whether your insider trading policies & procedures prohibit trading in third-party companies, because that could end up affecting the “breach of duty” analysis. The blog also says that the “Investor Choice Advocates” piled on to the trend of challenging SEC authority, by filing an amicus brief to say the “shadow trading” theory violates the “major questions” doctrine. (The court didn’t find the brief persuasive.)

– Liz Dunshee