Introduction to SEC v. Panuwat: Understanding “Shadow” Insider Trading


In the groundbreaking case SEC v. Panuwat, the Securities and Exchange Commission (SEC) successfully pioneered a legal theory referred to as “shadow” insider trading. This concept extends traditional insider trading paradigms to situations where an individual, privy to material non-public information (MNPI) regarding one company, capitalizes on that knowledge to trade securities in another company. The case against Matthew Panuwat, a former executive at Medivation, illuminates this novel application of the law.

According to the SEC’s complaint, Panuwat, an employee of pharmaceutical company Medivation, became aware that Medivation would soon be bought out. Just a few minutes after learning that information, Panuwat commenced purchasing out-of-the-money, short-term call options in another company, Incyte. The SEC argued that Incyte was a closely comparable company to Medivation, and therefore, these trades in Incyte constitute prohibited insider trading.

It is difficult to overstate the expansion Panuwat represents for potential liability for insider trading. To be sure, the defense bar will attack this unfair and unwise regulation-through-litigation, and the defense bar will be joined by academics, public interest groups, and supporters in the business community. In the meantime, every entity and individual involved in the capital markets—from public companies to retail traders—need to take head of the increased risks and perils that comes with trading in a post-Panuwat market. For companies, this includes at least re-evaluating insider trading policies and educating directors, officers, and employees on the new landscape. And securities lawyers need to adjust their advice to clients and strategies for defending insider trading investigations, regulatory actions, and prosecutions.

Ultimately, Congress needs to step in and define by legislation what is and is not illegal insider trading, which it has never done to date. One can debate what should and should not be permitted, but Congressional action would provide the best opportunity for consideration of the competing considerations of the scope and contours of the insider trading laws.