An Atypical Case of Insider Trading

On August 17, 2021, the Securities and Exchange Commission (“SEC”) filed an enforcement action against Matthew Panuwat (“Panuwat”) that expands the “misappropriation theory” of insider trading liability based on Panuwat’s “shadow trading.” While Panuwat is expected to challenge the SEC’s theory of liability, this action and others brought by the SEC this summer underscore the importance of routinely examining insider trading policies to ensure a baseline level of defense against potential claims of insider trading.


Panuwat was a business development executive at Medivation, Inc. (“Medivation”), a mid-sized biopharmaceutical company. According to the SEC’s Complaint, as part of his duties, Panuwat learned that Medivation would be acquired by Pfizer, Inc. (“Pfizer”). Thereafter (literally within minutes), the SEC alleges that Panuwat purchased out-of-the-money, short-term stock options in Medivation’s competitor, Incyte Corporation (“Incyte”). Allegedly, Panuwat did so anticipating that Incyte’s value would “materially increase when the Medivation acquisition announcement became public.”

When the acquisition was publicly announced, Medivation’s stock price increased by about 20% and Incyte’s increased by about 8%. Importantly, the value of Panuwat’s stock options roughly doubled in value on the day of the announcement. As a result, the SEC alleges that Panuwat realized an unlawful profit of approximately $107,066.

The SEC’s complaint hinges on Panuwat’s “shadow trading” and his apparent violation of Medivation’s insider trading policy, which prohibited him from personally profiting using material, non-public information about Medivation by trading in Medivation securities or the securities of another publicly traded company.

What is Insider Trading?

Insider trading is prohibited by Section 10(b) of the Securities Exchange Act of 1934. SEC Rule 10(b)5-1 provides that the manipulative and deceptive devices prohibited by Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5 include, among other things, trading in the securities of any issuer on the basis of material, non-public information about that security or issuer. Essentially, as long as the material information about the company is non-public, trading in that company’s securities is prohibited.

SEC insider trading enforcement actions are normally brought under one of two theories: (1) classical; or (2) misappropriation. Under the “classical” theory, the defendant illegally trades in the securities of the company for which he/she serves as an officer, director, fiduciary, or employee using material, non-public information, or the defendant furnishes material, non-public information to another individual who then uses it to illegally trade securities. In other words, the classical theory of liability is focused on punishing the insider or “tipper.” Conversely, under the “misappropriation” theory, the defendant illegally trades in the securities of another company using material, non-public information that the defendant learned while entrusted with material, non-public information in a position of confidence, thereby violating the fiduciary duty he/she owed to the information’s source. The misappropriation theory goes after the trusted “outsider” who improperly uses confidential and material “inside” information.

What is Shadow Trading?

Panuwat’s case does not fall under either theory. He didn’t trade shares of Medivation or shares of Medivation’s acquiror, Pfizer. He used the confidential, non-public information he learned about Medivation’s impending acquisition to trade in the securities of a completely separate competitor entity, Incyte. So, what’s the SEC’s basis for its enforcement action?

The SEC’s action against Panuwat is based on a “shadow trading” theory. Shadow trading is the improper trading of securities using material, non-public information of a related or linked company. The Panuwat action is the first instance of the SEC litigating an action using the shadow trading theory. The SEC’s theory is tied to some critical facts:

  • Panuwat received confidential presentations that specifically compared Medivation and Incyte as comparable targets;
  • Panuwat had reason to believe that the acquisition of Medivation was likely to increase Incyte’s stock price;
  • information about an impending merger is ordinarily considered “material”; and
  • Panuwat was previously an investment banker and understood how the securities industry worked.

If the SEC is successful, this case of first impression could widen the potential pool of those who could be liable for insider trading and the theories by which the SEC may bring enforcement actions.


This action is an important reminder for companies to consider whether their insider trading policies and procedures adequately protect against shadow trading. At a minimum, an insider trading policy should prohibit trading on the basis of material, non-public information of your company or any other company. If the policy has not been reviewed in a few years, consider dusting it off to ensure it covers the right insiders and that blackout periods and pre-clearance procedures are consistent with your actual practice and are followed closely.

If you have any questions about this SEC enforcement action or your insider trading policy, please contact a member of Harter Secrest & Emery LLP’s Securities and Capital Markets group at 585.232.6500 or 716.853.1616.

Attorney Advertising. Prior results do not guarantee a similar outcome. This publication is provided as a service to clients and friends of Harter Secrest & Emery LLP. It is intended for general information purposes only and should not be considered as legal advice. The contents are neither an exhaustive discussion nor do they purport to cover all developments in the area. The reader should consult with legal counsel to determine how applicable laws relate to specific situations. ©2021 Harter Secrest & Emery LLP