A recent decision in the Northern District of California expands insider trading liability involving public company securities that are not the direct subject of the material nonpublic information (“MNPI”).  In SEC v. Panawat, 4:21-cv-06322 (N.D. Cal. Aug. 17, 2021), Matthew Panawat, a former employee of Medivation, Inc., was found liable in an SEC civil matter for insider trading based upon the SEC theory of  “shadow trading.” Shadow trading occurs when an individual learns insider information about the purchase of a corporation, and, rather than purchase stocks of the corporation to be acquired, they buy stocks of its competitor. This is precisely what Panawat was found to be guilty of doing—he learned that Pfizer, Inc. was going to acquire his then-employer, Medivation, Inc. Rather than purchase stock options of his employer, he bought options from its competitor, Incyte, within minutes of learning the information, and profited over $100,000 when the acquisition was made public.  This is the first time the SEC utilized this theory to find someone liable for insider trading using information obtained from one’s company to purchase stock from competitors.  The SEC’s action represents a unilateral expansion of Rule 10b-5, outlawing a widely employed trading practice that surpasses congressional authority. The U.S. District Court for the Northern District of California denied Panuwat’s motion for summary judgment, illuminating an unprecedented attempt to expand the definition of insider trading and the meaning of “materiality.”

The result could significantly reshape the landscape for insider trading liability. Moreover, this vague standard could be applied to any situation where information from one company influences the stock price of another. The validity of the SEC’s argument remains unreasonable, as it implies that all corporate insiders could be held accountable for trading all stocks based on their company’s information. While the SEC advanced this theory in the arena of a civil trial, the implications of this ruling could trickle into criminal prosecutions of insider trading—expanding criminal liability for such activity.

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