SEC Wins Trial in Novel ‘Shadow’ Insider Trading Crackdown

(Bloomberg) — The US Securities and Exchange Commission won a jury verdict in its ground-breaking insider-trading case that seeks to bar employees from using non-public information about their own company to place bets on rival stocks.

The closely watched two-week San Francisco civil trial was the regulator’s first enforcement action targeting so-called shadow trading, a widespread phenomenon that researchers say has gone largely unchecked. Congress has never explicitly defined insider trading, leaving courts to decide when the SEC oversteps its authority.

Friday’s verdict comes as SEC enforcement chief Gurbir Grewal has brought cases that have pushed the agency into new territory — and also drawn criticism that the regulator has stretched its powers beyond its jurisdiction. It followed a big victory for the SEC’s efforts to assert greater control over cryptocurrency when a jury in New York hours earlier found Terraform Labs Pte. and co-founder Do Kwon liable for fraud over the firm’s 2022 collapse.

In the San Francisco case, the SEC argued that former Medivation Inc. executive Matthew Panuwat broke the law when he learned that his company would soon be acquired and, believing the news would benefit other companies in the industry, traded another biotech company’s call options.

The agency said Panuwat invested more than $117,000, or almost half of his annual salary, on call options in rival Incyte Corp. just seven minutes after receiving an August 2016 email from the chief executive officer at Medivation saying Pfizer Inc. was interested in acquiring it. Panuwat allegedly made $120,000 on the trades.

Read More: SEC Insider Trial Targets Executive Who Bought Rival’s Stock

Panuwat’s attorneys countered that the trades weren’t based on confidential information because the merger had been covered publicly by the press. They also argued that the SEC couldn’t prove that Panuwat had an intent to defraud because he didn’t know it was illegal to trade in a company that wasn’t his employer and that didn’t conduct business with Medivation.

In its 2021 complaint, the agency sought unspecified monetary damages from Panuwat and a court order barring him from serving as an officer or director of a publicly traded company.

US District Judge William Orrick asked the SEC and defense attorneys to submit a joint statement about proposed remedies by April 15.

“As we’ve said all along, there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple,” the SEC’s Grewal said in a statement after the verdict.

Panuwat’s lawyer didn’t immediately respond to a request for comment.

The case is Securities and Exchange Commission v. Panuwat, 21-cv-06322, US District Court, Northern District of California (San Francisco).

–With assistance from Matthew Bultman.

(Updates with SEC statement.)

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