S.E.C. asserts new theory of insider trading to cover “shadow trading”

The Securities & Exchange Commission (SEC) is pressing a new theory of liability concerning insider trading laws. Specifically, the SEC is requesting that a federal court deem the practice of “shadow trading” illegal under existing law. Shadow trading is a practice in which an individual associated with an entity trades in another public company’s securities. All of this is done based on material, nonpublic information obtained during their employment.

In SEC v. Panuwat, the Commission asserted that Matthew Panuwat, the former business development head of Medivation, Inc., engaged in insider trading when he acquired securities of a rival company, Incyte Corporation.

The SEC contends that Panuwat anticipated that the Pfizer acquisition of Medivation would cause the stock prices of comparable companies like Incyte to quickly increase. Panuwat used short-term, out of the money options, meaning that the options were cheaper than other options that didn’t require a significant share price jump to substantially increase in value. The SEC likely views the case as a strong test case given that Panuwat purchased the Incyte options minutes after learning of the Pfizer acquisition of his firm, from his work computer. Further, the SEC alleges that Panuwat’s conduct is in breach of company agreements and/or policies. First, the SEC alleges that Panuwat agreed to keep information he learned during his employment confidential, and not make use of it. Second, the SEC alleges that he signed on to Medivation’s insider trading policy, which prohibited employees from personally profiting from the material nonpublic information concerning Medivation by trading in Medivation securities or the securities of another publicly traded company.


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