An April 5 verdict on a precedent-setting shadow trading case by the Securities and Exchange Commission (SEC) has underscored that the risk profile for stock trading among officers and directors of public companies, and potentially those in private firms, may have expanded. Specifically, this case revolves around so-called shadow trading, a behavior where a corporate insider leverages nonpublic information about their own company to trade in the securities of another publicly traded company in the same industry.
Following the SEC’s ongoing initiatives in this vein of enforcement, it’s suggested that officials from public firms should examine and update their insider trading policies to include prevention measures against shadow trading. Similarly, private companies may want to contemplate the creation of equivalent policies.
On April 5, a Californian jury determined that Matthew Panuwat, former head of business development at Medivation, Inc., was guilty of shadow trading. This verdict was the outcome of a civil enforcement action by the SEC. The jury reached its conclusion after a trial spanning eight days, during which testimonies were heard from Panuwat and several of his former associates.
Panuwat’s previous employer, Medivation, Inc., is a California-based, mid-cap biopharma firm specializing in oncology. It was within this context that Panuwat bought stock options in another oncology-focused biopharma company, Incyte Corp., an act influenced by his belief that an anticipated acquisition of Medivation by Pfizer would have beneficial knock-on effects across the market segment, presumably inflating Incyte’s stock price. The activities surrounding this trade, potentially leading to a re-evaluation of how relationships and duties are defined within securities trading, have given the first insights into how legal responses to shadow trading might develop.
Traditionally, insider trading policies have often been set by public companies to include limits on trading in other companies with whom their company has commercial dealings. They may even go to the extent of restricting trade in competitors or other significant third parties. However, the language of these policies may need reconsideration in light of the recent case, notably to detail the level of permissible trading activities and which companies’ securities could be affected by trading restrictions.
Currently, most private firms do not have policies pertaining to insider trading, due to the complexities involved in buying and selling company stock as compared to trading on the open market. However, as demonstrated by Panuwat’s case, publicly traded companies are not the only entities susceptible to shadow trading. Consequently, these companies might find it prudent to address shadow trading in their employee confidentiality agreements or other related policies.
The case in question was Securities and Exchange Commission v. Panuwat.