SEC Defeats Motion To Dismiss Insider-Trading Complaint Alleging Novel "Shadow Trading" Theory

Published date20 January 2022
Subject MatterCorporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Securities
Law FirmProskauer Rose LLP
AuthorMr Jonathan Richman and Julia D. Alonzo

The SEC prevailed on a motion to dismiss a closely watched lawsuit alleging that the defendant had engaged in insider trading based on news about a not-yet-public corporate acquisition when he purchased securities of a company not involved in that deal. The January 14, 2022 decision in SEC v. Panuwat (N.D. Cal.) marks the first time a court has considered the theory of "shadow trading," which involves trading the securities of a public company that is not the direct subject of the material, nonpublic information ("MNPI") at issue.

The Panuwat decision does not appear to break new ground under the misappropriation theory of insider trading in light of the particular facts alleged. But the "shadow trading" theory warrants attention because, on other sets of allegations, it can have wide-ranging ramifications for traders.

Factual Background

The facts of the complaint, described in detail here, involved Matthew Panuwat, the then-head of business development at a pharmaceutical company called Medivation. The SEC alleged that Panuwat had learned that Medivation was on the verge of being acquired by a large pharmaceutical firm and that, before the acquisition was announced, he had purchased call options on securities issued by one of Medivation's competitors, Incyte.

The SEC's theory was that several potential acquirors had been interested in buying Medivation, that Incyte was one of a "limited number of mid-cap" companies in Medivation's area of business, that Incyte would become more attractive to potential acquirors once the Medivation deal was announced, and that Incyte's stock price would increase as a result. The facts allegedly supported the SEC's theory: when the Medivation deal was announced, Incyte's stock price rose, and Panuwat made $107,066 on his call options.

The Court's Decision

Panuwat moved to dismiss the SEC's complaint on two grounds. First, he argued that the SEC's complaint had failed to satisfy three elements of the misappropriation theory of insider trading: materiality, breach of duty, and scienter. Second, he asserted that the SEC's allegations violated his due-process rights because the shadow-trading theory inappropriately expanded insider-trading law beyond its generally understood parameters and thereby failed to provide adequate notice of what the law prohibits. The court disagreed and denied Panuwat's motion to dismiss.


The court began by addressing the parties' materiality contentions, which constituted the "bulk of...

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