On May 29, 2024, the Securities and Exchange Commission filed a motion for final judgment, seeking to impose civil penalties in its first enforcement action brought on the theory of “shadow trading.”[1]

The SEC secured a jury verdict finding Matthew Panuwat liable for violating insider trading laws on April 5, 2024 after an eight-day trial. Shadow Trading is a type of illegal insider trading in which material non-public information (“MNPI”) regarding one company is leveraged to execute a securities transaction regarding a second company whose share price is predictably correlated to the disclosure of the MNPI.[2]

The agency’s requested penalty would: (1) prohibit Panuwat from serving as an officer or director of publicly traded companies;[3] and (2) require Panuwat to pay a civil penalty of $321,197.40.[4]

The monetary amount the SEC is seeking is “equal to three times Panuwat’s trading profits, as measured based on the August 22, 2016 prices of his Incyte call options”[5] based on the agency’s application of a six-factor test regarding insider trading:

(1) the egregiousness of the violations;

(2) the isolated or repeated nature of the violations;

(3) the defendant’s financial worth;

(4) whether the defendant concealed his trading;

(5) what other penalties arise as the result of the defendant’s conduct; and

(6) whether the defendant is employed in the securities industry.[6]

The SEC contends that a number of factors weigh in favor of a “substantial penalty,” even in light of this being Panuwat’s first violation.[7] The agency pointed to Panuwat’s admitted net worth, his prior employment in the securities industry, his efforts to conceal his trading, and the absence of any other penalty.[8] Further, the SEC characterized Panuwat’s conduct as “egregious,” noting that he was a sophisticated trader and former investment banker who admitted to knowing that trading securities based on his company’s MNPI was prohibited.[9]

As we noted in SEC Wins Shadow Trading Trial But Court Will Get a Second Look, the Court is also called upon to rule on Panuwat’s renewed motion for judgement as a matter of law seeking to overturn the jury’s verdict.[10]

Panuwat claims that the evidence presented at trial fails as a matter of law to demonstrate scienter because the jury could not draw the inference of Panuwat’s intent without resorting to an unacceptable “series of speculative inferences.”[11] The defendant argues that the SEC’s evidence relied primarily on the timing of Panuwat’s trading, which invited the jury to draw a conclusion based on a post hoc, ergo propter hoc logical fallacy.[12]

Panuwat has also filed a motion seeking a new trial.[13] Panuwat’s request rests in part on the Court’s rulings that precluded the defendant from informing the jury that this was the SEC’s first shadow trading enforcement action. Panuwat asserts that the Court compounded this error by allowing the SEC to characterize the shadow trading theory as “garden variety insider trading,” branding the decision as “grossly unfair.”[14]

The defendant’s motion further claims that the Court’s jury instruction was improperly prejudicial because it “endorse[d] the SEC’s insider trading label,” pointing to a distinction drawn by the Supreme Court between the classical and misappropriation theories of insider trading. Panuwat’s motion asserts that the Supreme Court explained that misappropriation-based liability is done by outsiders, the two terms are not interchangeable, and the Court’s use of the term “insider” was erroneous when it could have used the “misappropriation.”[15]

In deciding these motions, we expect the Court to articulate the first standard for determining whether and the extent to which unrelated securities issuers are "linked" for purposes of shadow trading liability, and a more definitive statement from the Ninth Circuit in the event of an appeal.

The case is Securities & Exchange Commission v. Panuwat, Dkt No. 3:21-cv-06322 (N.D. Cal. Aug 17, 2021).

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[1] Secs. & Exchg. Comm’n v. Panuwat, Dkt No. 3:21-cv-06322 (N.D. Cal. Aug 17, 2021), Dkt. No. 189.

[2] See Shadow Trading, M. Mehta, D. Reeb & W. Zhao, Accounting Rev. (2021) 96 (4): 367-404.

[3] Specifically, the SEC seeks to bar Panuwat from serving as an officer or director for any securities issuer: (1) that has a class of securities registered pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l]; or (2) that is required to file reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)]. Dkt. No. 189-1 at 2.

[4] Dkt. No. 189-1.

[5] Dkt. No. 189 at 20-21.

[6] SEC v. Gowrish, No. C 09-5883 SI, 2011 WL 2790482, at *9 (N.D. Cal. July 14, 2011)) (citing factors articulated in S.E.C. v. Happ, 392 F.3d 12, 32 (1st Cir. 2004)).

[7] Dkt. No. 189 at 22.

[8] Id. at 21-22.

[9] Id. at 20-21.

[10] Dkt. No. 191.

[11] Id. at 4, 26 (citing Lakeside-Scott v. Multnomah Cnty., 556 F.3d 797 at 802 (9th Cir. 2009)).

[12] Id. at 26. Post hoc, ergo propter hoc (Latin: “after this, therefore because of this”) is an error in reasoning in which causation is incorrectly inferred when one event precedes another.

[13] Dkt. No. 192.

[14] Id. at 28.

[15] Id. at 16-17, (citing United States v. O’Hagan, 521 U.S. 642 (1997), at 652).