SEC’s Win in ‘Shadow Trading’ Case Shines Light on Corporate Trading Policies

The circumstances of individual cases may differ, but we all know that insider trading involves using material, non-public information to buy and sell a company’s securities. But what if you possess inside information about one company that also applies to another, like one of its rivals? Known as “shadow trading,” that’s a no-no, too.

Following a string of high-profile losses in court, the Securities and Exchange Commission recently scored a win in such a case. The decision could prompt companies to re-evaluate how they monitor the trading behavior of key employees.

The ruling at issue came earlier this month in the trial of Matthew Panuwat, a former executive at biotechnology company Medivation. The SEC charged that Panuwat, who served as a business development executive, bought call options for rival company Incyte Corp. in 2016 after learning pharmaceutical maker Pfizer planned to buy Medivation. The SEC’s case rested on the notion that the Medivation sale would have a “spillover effect” boosting the stock price of its rival. The agency presented evidence that Panuwat bought the Incyte stock options within minutes after Medivation’s chief executive officer, David Hung, sent an email to employees notifying them about Pfizer’s intention to buy the company.

According to the SEC, Panuwat raked in $120,000 on the trade, as Incyte’s share price “increased materially” once the news of Medivation’s sale went public. During closing arguments, SEC attorney Bernard Smyth likened Panuwat’s actions to run-of-the-mill insider trading. “Mr. Panuwat purchased Incyte call options because he had confidential inside information that he believed would move Incyte’s stock,” Smyth said.

The verdict and the potential for additional SEC enforcement efforts involving shadow trading should prompt companies and their compliance officers to undertake a thorough review of their trading policies, according to white-collar crime specialists Gregory R. Brower and Emily R. Garnett of Brownstein Hyatt Farber Schreck, LLP.  “This case presents a novel offshoot from traditional insider trading cases and will be an important development for general counsels and compliance professionals to consider in the context of corporate insider trading policies,” they wrote in an analysis of the decision.

However, SEC Division of Enforcement Director Gurbir S. Grewal downplayed just how “novel” the SEC’s approach really was. “As we’ve said all along, there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple,” Grewal said.

That sounds like a signal to corporate compliance officers about the SEC’s attitude toward shadow trading going forward. They should prepare for the agency’s investigators to scrutinize internal data surrounding mergers to determine if employees profited from the announcements. Meanwhile, it may be time to update compliance training and policies regarding the trading of peer companies’ stocks.