What to Know About the SEC’s “Shadow Trading” Enforcement Action

The Securities and Exchange Commission (SEC) recently brought an enforcement action against a biopharmaceutical executive for a form of insider trading known as “shadow trading.”

The Securities and Exchange Commission (SEC) recently brought an enforcement action against a biopharmaceutical executive for a form of insider trading known as “shadow trading.” The term refers to when corporate insiders attempt to circumvent insider trading restrictions by facilitating trading in economically-linked firms, such as competitors and supply chain partners.

The enforcement is notable because the executive traded in the stock of a competitor rather than his own company. According to the complaint, Matthew Panuwat, the then-head of business development at Medivation, a mid-sized, oncology-focused biopharmaceutical company, purchased call options in Incyte Corporation, another mid-cap oncology-focused biopharma company, just days before Pfizer announced it would acquire Medivation. 

“Biopharmaceutical industry insiders frequently have access to material nonpublic information about mergers, drug trials, or regulatory approvals that impacts the stock price of not only their company, but also other companies in the industry,” Gurbir Grewal, Director of the SEC’s Enforcement Division, said in a press statement. “The SEC is committed to detecting and pursuing illegal trading in all forms.”

SEC Enforcement Action Alleging Shadow Trading

The SEC complaint specifically alleges that Panuwat purchased the Incyte Corp’s stock options within minutes of learning that Pfizer’s head of business development had expressed overwhelming interest in acquiring Medivation and said that Pfizer’s CEO would call Medivation’s CEO later that day to reiterate that message and resolve final details with respect to an impending acquisition of Medivation by Pfizer.

According to the complaint, Panuwat knew that investment bankers had cited Incyte as a comparable company in discussions with Medivation and he anticipated that the acquisition of Medivation would likely lead to an increase in Incyte’s stock price. According to the SEC complaint:

Panuwat learned the foregoing information through his employment at Medivation, and he knew or was reckless in not knowing that the information was material and nonpublic. Panuwat also knew, or was reckless in not knowing, that the information concerning Medivation’s imminent acquisition was material not only to Medivation, but also to Incyte, a peer company in the biopharmaceutical industry that was also publicly-traded, mid-cap, and oncology-focused. Medivation’s undisclosed acquisition would have been viewed by a reasonable investor in Medivation or Incyte as having significantly altered the total mix of information made available. The public announcement of Medivation’s acquisition at a significant premium to its then-current share price would likely have a positive impact on Incyte’s stock price. For example, the acquisition of Medivation also made Incyte a more attractive target for acquisition.

The SEC further alleged that Medivation’s insider trading policy expressly prohibited Panuwat from using confidential information he acquired at Medivation to trade in the securities of any other publicly-traded company. Following the announcement of Medivation’s acquisition, Incyte’s stock price increased by approximately 8 percent. The complaint alleges that, by trading ahead of the announcement, Panuwat generated illicit profits of $107,066. The SEC’s complaint charges Panuwat with violating the antifraud provisions of the federal securities laws, and seeks a permanent injunction, civil penalty, and an officer and director bar.

Key Takeaway

The SEC enforcement action confirms that the agency is committed to cracking down on insider trading in all its forms. More importantly, it suggests that “shadow trading” is on the SEC’s radar and may result in additional enforcement actions in the future. As the SEC steps up its scrutiny over whether employees are trading in their companies’ business partners and competitors to circumvent insider trading regulations, businesses may also want to add express prohibitions in their own insider trading policies. 

If you have questions, please contact us

If you have questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.