District Court Denies Motion To Dismiss SEC's First 'Shadow Trading' Complaint

• Published date: 25 January 2022
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Securities
• Law Firm: Kramer Levin Naftalis & Frankel LLP
• Author: Kramer Levin'S Business Immigration Group

Judge William H. Orrick of the Northern District of California recently denied a motion to dismiss the Securities and Exchange Commission's (SEC's) first insider trading case charging a defendant with "shadow trading."¹ The SEC alleged that Matthew Panuwat, a biopharmaceutical executive, learned that his employer, Medivation, was due to announce an acquisition by Pfizer and, based on that information, immediately bought call options in a third pharmaceutical company, in the same market as Medivation. The court rejected Panuwat's arguments that the SEC failed to state a claim against him for insider trading and that allowing the case to proceed under this novel theory would violate his due process rights.

The facts of the case made it a particularly good vehicle for the SEC to test its theory but may also provide a basis for future litigants to draw meaningful distinctions based on their own fact patterns. Panuwat, a former investment banker,² was a senior director of business development at Medivation, a midsize publicly traded biopharmaceutical company that developed cancer drugs. His role was to explore strategic transaction opportunities for Medivation, including researching potential acquisition targets. One company that he allegedly tracked closely was Incyte, which, like Medivation, was a developer of oncology drugs, had an FDA-approved drug on the market and was seen as a potential acquisition target for larger pharmaceutical companies.

Because of his position at Medivation, Panuwat was entrusted with sensitive, nonpublic information. This included a summary of bids to purchase Medivation, five of which were at significant premiums to the then-current stock price; copies of letters, marked "confidential," soliciting final bids; and an email indicating that Pfizer had an "overwhelming" interest in acquiring the company and that the companies' CEOs were set to have a call to "resolve final details" of the acquisition. Minutes after receiving that email, Panuwat bought short-dated, out-of-the-money call options for Incyte stock. Despite his long-standing interest in the company, he had never bought Incyte stock or options before receiving the email about the impending acquisition.

According to the complaint, Panuwat had good reason to know that the announcement of an acquisition of Medivation would lead to a material increase in Incyte's stock price: Panuwat knew that analysts listed Incyte as a peer company to Medivation, he knew that Medivation and...