In a recent and intriguing legal case, the concept of “shadow trading” was evaluated by a U.S. District Court. The subject concerned Matthew Panuwat, an ex-employee of Medivation Inc., a biopharma company specializing in oncology. Panuwat was charged with insider trading in August 2021 by the Securities and Exchanges Commission (SEC), preceding the public announcement of Medivation’s acquisition by multinational pharmaceutical corporation Pfizer.
This case’s distinction comes from the nature of his trades – Panuwat neither traded Medivation shares nor those of Pfizer. Nor did he ostensibly tip anyone about the impending acquisition. This has resulted in the case garnering substantial interest across legal circles.
“Shadow trading,” as it’s called, involves trading shares of companies that could be indirectly impacted by significant market news, without actually trading shares of the companies directly involved. In a detailed review provided by Cooley LLP, they describe how Panuwat’s trades were executed in other biopharma companies that were very likely to be indirectly affected by the acquisition news.
The District Court applied the “misappropriation” standard of §10(b) to view Panuwat’s shadow trading, noting it may qualify as fraud ‘in connection with’ the purchase or sale of a security. This analysis provides a novel interpretation of §10(b) that may have broad ramifications for market participants who seek to benefit from non-public information through indirect trading strategies.
It is yet to be seen whether future courts will interpret the “misappropriation” standard in a similar manner, especially in insider trading cases which don’t involve the direct trading of shares pertaining to the concealed information. Undeniably, this refined interpretation of §10(b) introduces a new dimension to the landscape of securities law.