On September 9, 2024, the Hon. William Orrick of the District of Northern California imposed the maximum penalty sought by the Securities and Exchange Commission (“SEC”) against Defendant Matthew Panuwat—a civil fine of three times Panuwat’s profits and a permanent bar from serving as an officer or director of a public company—in a decision that denied requests to overturn the jury’s verdict or grant a new trial.[1]
As we discussed in Shadow Trading Court to Weigh Competing Post-Trial Motions, the SEC premised its request for the maximum penalty on a number of factors, including its characterization of Panuwat’s conduct as “egregious,” noting that Panuwat was a sophisticated trader and former investment banker who admitted to knowing that trading securities based on his company’s material non-public information (“MNPI”) was prohibited.[2]
This was the SEC’s first enforcement action brought on the theory of “shadow trading,” a type of illegal insider trading in which MNPI from one company is leveraged to execute a transaction in the securities of a second company whose share price is predictably correlated to the disclosure of the MNPI.[3]
“Novelty” Was Irrelevant
Panuwat sought to overturn the jury’s verdict based in part on novelty, contending that it was “grossly unfair” for the SEC to “argue the case under a garden variety theory of insider trading” especially in light of the Court’s “ruling that no one at trial could characterize the case as ‘highly unusual,’ ‘unique,’ ‘novel,’ ‘unanticipated,’ ‘unexpected,’ or brought without fair notice.”[4]
The Court rejected this argument,[5] siding instead with the view of SEC’s Director of Enforcement, Gurbir Grewal:
As we’ve said all along, there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple. Defendant used highly confidential information about an impending announcement of the acquisition of biopharmaceutical company Medivation, Inc., the company where he worked, by Pfizer Inc. to trade ahead of the news for his own enrichment.[6]
“Express” Policy Term Not Required
Panuwat also argued that the SEC should be required to demonstrate that Medivation “expressly forbade him from trading Incyte securities.”[7] Panuwat based this argument on the principle that full disclosure may foreclose liability because there can be no concealment by the trader entrusted with the MNPI.[8]
Rejecting this view, the Court stated that “to find a defendant liable under the misappropriation theory of insider trading, the SEC must demonstrate that the defendant ‘knowingly misappropriated [MNPI] for securities trading purposes, in a breach of duty arising from a relationship of trust and confidence owed to the source of the information.’”[9] “The SEC’s theory at trial was that Medivation entrusted Panuwat with confidential information and he exploited it for his own gain.”[10]
The Court concluded that requiring the SEC to demonstrate that Panuwat knew his Incyte “trades were prohibited by Medivation [ ] would largely defeat the purpose of the duty of trust and confidence that the Supreme Court and Ninth Circuit have described.”[11]
Timing and Silence May Show Intent
Regarding scienter, Panuwat claimed that the evidence offered by the SEC was legally insufficient for the jury to conclude that he intended to defraud Medivation. Panuwat argued that the SEC’s evidence was limited to: (1) he possessed “confidential information”; (2) the timing of his trade “suggested he recognized the information he possessed was material to Incyte”; and (3) that he allegedly “knew he lacked consent” because he “never told anyone about his trades.”[12]
The Court also rejected this argument, finding instead that these facts alone were “sufficient for a jury to conclude that Panuwat acted knowingly or recklessly in using Medivation’s confidential information that was material to Incyte to trade in— and profit greatly from trades in—Incyte call options.”[13]
The case is Securities & Exchange Commission v. Panuwat, No. 3:21-cv-06322 (N.D. Cal. Aug 17, 2021).
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[1] Secs. & Exchg. Comm’n v. Panuwat, No. 3:21-cv-06322 (N.D. Cal. Aug 17, 2021), Dkt. No. 210.
[2] Dkt. No. 189 at 20-21.
[3] See Shadow Trading, M. Mehta, D. Reeb & W. Zhao, Accounting Rev. (2021) 96 (4): 367-404.
[4] Dkt. 210 at 28-29.
[5] Id. at 29.
[6] G. Grewal, Statement on Jury’s Verdict in Trial of Matthew Panuwat, Secs. & Exchg. Comm’n (Apr. 5, 2024) available at https://www.sec.gov/news/statement/grewal-statement-040524.
[7] Dkt. 210 at 10.
[8] Id.
[9] Id. at 6, citing S.E.C. v. Talbot, 530 F.3d 1085, 1091 (9th Cir. 2008); see also United States v. O’Hagan, 521 U.S. 642, 652-63 (1997).
[10] Id. at 11.
[11] Id. at 12.
[12] Id. at 40.
[13] Id. at 40-41.
