Shadow Trading: The SEC’s New Angle on Insider Trading | woodruff sawyer


But the Securities and Exchange Commission wants to make an example of another type of insider trading.

Dubbed “parallel trading” in this academic paper, the SEC has decided to prosecute insider trading that involves trading do not in the securities of the company of an employee or of that company’s merger partner, but in the securities of another company in the same industry.

In SEC vs. Panuwatthe SEC alleges that Matthew Panuwat, a former executive of Medivation Inc., an oncology biopharmaceutical company, learned that his company was to be acquired by Pfizer through an email from Medivation’s CEO.

Within minutes, the complaint alleges, Mr. Panuwat “misappropriated Medivation’s confidential information by purchasing – from his work computer – short-term stock options out of Incyte Corporation money. (“Incyte”), another mid-cap oncology-biopharmaceutical company that he believes will increase in value significantly when news of the Medivation acquisition becomes public.

When Medivation publicly announced that Pfizer would acquire it, Incyte shares then rose 8% and Mr. Panuwat’s stock value roughly doubled, for a profit of $107,066.

The details

Mr. Panuwat was not a baby in the woods when it came to trading corporate securities. Rather, he was a seasoned trading professional and “held securities industry licenses and was registered with the SEC as an associate of an investment bank in San Francisco that acted as a broker and dealer in securities,” according to the complaint.

While employed at Medivation, Mr. Panuwat signed the company’s Insider Trading Policy, which, among other things, stated the following:

…you may be able to make a financial profit by buying, selling or otherwise trading in the securities of the Company…or the securities of another publicly traded company, including any significant employees, customers, partners, suppliers or competitors of the Company. …for anyone to use this information for personal gain…is illegal. …

[Emphasis added.]

The SEC complaint alleges that Mr. Panuwat was closely involved in the steps leading up to the merger, which is not surprising given that he was the former senior director of business development at Medivation:

Panuwat, who himself had years of experience as an investment banker and specialized in transactions involving the pharmaceutical industry, worked closely with investment bankers at Medivation and with other senior Medivation executives, to explore Medivation’s alternatives, including a possible merger with another company. .

The complaint said that during the process, Mr. Panuwat learned of the similarities between Medivation and Incyte through investment bankers, “including that both were value, mid-cap, oncology-focused companies. , with a profitable FDA-approved (commercial stage) drug in the US market.

The SEC alleges that in 2016, Mr. Panuwat knew that “large-cap pharmaceutical companies were interested in acquiring mid-cap oncology-focused biopharmaceutical companies with commercial-stage drugs; that there were only a few left, including Medivation and Incyte, to acquire.

The complaint details the nature of Mr. Panuwat’s business activities when he learned that the deal with Pfizer was to go through:

Panuwat logged into his personal brokerage account from his work computer and purchased 578 call option contracts from Incyte with strike prices of $80, $82.50 and $85 per stock – significantly above Incyte’s stock price of $76 to $77 per share at the time – and the earliest possible expiration date of September 16, 2016. Panuwat knew that Incyte should not not make a major announcement, such as the release of a quarterly earnings report, prior to the options expiration date. On the contrary, Panuwat predicted that Incyte’s share price would surge in less than a month after the public disclosure of the upcoming Medivation acquisition announcement. Panuwat had never traded in Incyte stock or options before.

The complaint alleges that Mr. Panuwat acted in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Exchange Act.

Mr Panuwat denied doing anything wrong and filed a motion to dismiss the case. In January, the U.S. District Court for the Northern District of California denied Mr. Panuwat’s motion to dismiss, in a preliminary victory for the SEC.

That said, it remains to be seen whether the SEC will ultimately prevail in the case at trial.

Take away food

We know that the SEC often uses academic research to fuel its actions, and shadow trading is in line with its past practices.

In 2020, academic research emerged that showed the phenomenon of parallel trading to be “an undocumented and widespread mechanism that insiders use to avoid regulatory scrutiny”.

While the outcome of this case remains to be seen, it is prudent to take steps now to consider the potential consequences with respect to corporate insider trading policies.

Whether or not the SEC succeeds in pursuing this strategy may be less important than ensuring that company insiders, including directors, officers and rank-and-file employees, stay out of the SEC’s sights. when it comes to this type of behavior.

Specifically, when training your company’s insiders on material nonpublic information, it is important to emphasize that insider trading rules may apply to the entire industry and not just to participants in a merger or other transaction.

Moreover, some are already speculating on the impact this could have on private fund managers.

The National Law Review points out that “for fund managers, the risks of ‘shadow trading’ can raise issues in terms of enforcing policies and procedures aimed at preventing insider trading”.

“For companies that allow employees ‘over the wall’ to regularly screen potential transactions,” the article states, “determining which companies should be placed on the company’s shortlist may become more difficult when information available to the Walls does not relate to a specifically identifiable company (such as a party to the transaction in question) or even to only a small number of identifiable companies. »

The law firm Akin Gump points out, however, that even before panuwat“we saw the review staff [at the SEC] Ask whether an adviser’s policies and procedures take into account the perceived risk that an adviser may obtain material nonpublic information about public issuers from private holding companies or other channels.

Akin Gump also offers four steps that fund managers should follow before the result of the panuwat Case.

Next steps

The SEC clearly takes insider trading seriously, whether typical or atypical involving puns or side trading. Also, keep in mind that companies are required to take reasonable steps to prevent insider trading.

The concept of parallel trading is tricky, so now is a good time to review your insider trading policy to determine if you need to update the policy in light of the panuwat Case.

Also consider offering live training with a question-and-answer session to your employees, including directors and officers.

On this last point, remember that Woodruff Sawyer offers our D&O insurance brokerage clients free personalized training on insider trading policies. These are trivia-based sessions that employees typically find valuable and surprisingly engaging, and are just one of the many training modules we offer to help our clients improve their risk profile.


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