TheCorporateCounsel.net

A few months ago, Dave blogged about SEC v. Panuwat, the agency’s novel insider trading action alleging that a corporate insider used MNPI about a pending acquisition of his company to unlawfully trade in the stock of a competitor that would be impacted by the deal. This “shadow trading” theory received a big endorsement last week, when a federal jury in San Francisco concluded after an eight-day trial that the executive had engaged in insider trading. Here’s SEC Director of Enforcement Gurbir Grewal’s statement on the jury’s decision:

“As we’ve said all along, there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple. Defendant used highly confidential information about an impending announcement of the acquisition of biopharmaceutical company Medivation, Inc., the company where he worked, by Pfizer Inc. to trade ahead of the news for his own enrichment. Rather than buying the securities of Medivation, however, Panuwat used his employer’s confidential information to acquire a large stake in call options of another comparable public company, Incyte Corporation, whose share price increased materially on the important news.”

This Proskauer blog discusses the case and points out that, like many other insider trading cases, this one was highly fact-specific:

The Panuwat verdict, like the prior court decisions, seems to have been fact-specific. For example, the jury’s materiality analysis presumably considered evidence showing 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) analysts had specifically cited the third party as a company that could be affected by the acquisition target’s transaction; (iii) the acquisition target’s investment banker had included the third party in the banker’s transaction analysis; and (iv) the trader had been directly involved in the underlying confidential corporate discussions and presentations concerning his employer’s sale. In addition, the SEC’s witnesses testified that the third party’s stock price was likely to be, and in fact was, positively affected by news of the Medivation acquisition. Changing any of those variables might have produced a different result.

The blog says that jury’s verdict may encourage the SEC pursue more “shadow trading”cases because the SEC appears to believe that there’s a lot of shadow trading going on. Since insider trading generally requires the trader to have breached a duty in trading on the basis of MNPI, the blog’s discussion of the kind of duties that a person engaging in shadow trading might be found to have breached is also helpful.

– John Jenkins