SEC Files Complaint in its First “Shadow” Insider Trading Action

August 30, 2021

The Securities and Exchange Commission, in a matter that appears to be a case of first impression, has filed a civil enforcement action against an individual alleging he traded in the securities of a competitor based on material nonpublic information learned in the course of his employment. Defendant Matthew Panuwat, a business development executive at a company called Medivation, obtained confidential information that his employer was merging with Pfizer. Panuwat allegedly used this information to personally trade short-dated, out-of-the-money options in the stock of Incyte Corporation, another mid-cap, oncology-focused biopharmaceutical company, and a competitor of Medivation. What sets this case apart is that Panuwat was not operating on specific information about Incyte’s business or operations. Rather, Panuwat allegedly traded based on the fact that investment bankers involved in the merger had identified Incyte as a comparable company to Medivation and his own knowledge of the market. The SEC’s complaint alleged Panuwat knew that there were few similar companies left to acquire within the industry, meaning that each acquisition was material to the remaining companies in making them potentially more valuable acquisition targets whose stock price may rise in the wake of a merger announcement.

This legal theory has not yet been tested in the courts but is referred to by academics as “shadow trading.” In the press release announcing the litigation, Gurbir Grewal, Director of the SEC’s Enforcement Division, stated that “[b]iopharmaceutical industry insiders frequently have access to material nonpublic information about mergers, drug trials, or regulatory approvals that impacts the stock price of not only their company, but also other companies in the industry. The SEC is committed to detecting and pursuing illegal trading in all forms.”

The litigation is still in the early stages but nevertheless shows the SEC’s intention to broadly construe its enforcement powers when pursuing insider trading violations. Whether this theory will be sustained is difficult to determine at this time, as the SEC will have to prove the materiality of information and a duty owed by Panuwat. With respect to the latter, the SEC appears to be relying on the insider trading policy of Medivation, which states as follows:

“During the course of your employment…with the Company, you may receive important information that is not yet publicly disseminated…about the Company. … Because of your access to this information, you may be in a position to profit financially by buying or selling or in some other way dealing in the Company’s securities…or the securities of another publicly traded company, including all significant collaborators, customers, partners, suppliers, or competitors of the Company. … For anyone to use such information to gain personal benefit…is illegal. …” (emphasis in complaint).

S&K Observations

Investment managers may want to consider reviewing their compliance, employee training, and insider trading policies in light of the risk that the shadow trading theory encompasses a broader range of securities beyond the parties to a transaction, such as competitors or comparable companies in an industry. In addition, investment managers may want to carefully review confidentiality or similar agreements to which they may be a party to determine whether such agreement may create a duty wider in scope than refraining from transacting in the securities of the counterparty issuer.

The litigation is titled SEC v. Matthew Panuwat and is pending in the Northern District of California. The complaint is available at

If you have any questions regarding this update, please reach out to Jack Yoskowitz (212-574-1215), Philip Moustakis (212-574-1604) or your primary Seward & Kissel attorney.