In August 2021, the SEC filed a complaint in the U.S. District Court charging Matthew Panuwat, a former employee of Medivation Inc., an oncology-focused biopharma, with insider trading in advance of Medivation’s announcement that it would be acquired by a big pharma company, Pfizer. As you know by now, this case has often been viewed as highly unusual: Panuwat didn’t trade in shares of Medivation or shares of the acquiror, nor did he tip anyone about the transaction. No, the SEC’s novel theory of the case was that Panuwat engaged in “shadow trading”; he allegedly used the information about the acquisition of his employer to purchase call options on Incyte Corporation, another biopharma that the SEC claimed was comparable to Medivation, based on an assumption that the acquisition of Medivation at a healthy premium would probably boost the share price of Incyte. Panuwat made over $100,000 in profit. The SEC charged that he violated Rule 10b-5 and sought an injunction and civil penalties. (See this PubCo post.) After losing a motion to dismiss, this past September, Panuwat moved for summary judgment, claiming that this was the wrong case to test out the novel shadow-trading theory: “Incyte and Medivation were fundamentally different companies with no economic or business connection, Medivation’s policies did not prohibit Mr. Panuwat’s investment, and Mr. Panuwat’s reasons for making the investment were entirely separate from the Medivation sale process and consistent with his prior investment practices.” The SEC responded that Panuwat’s “actions fit squarely within the misappropriation theory of insider trading” and that his “actions provide strong evidence of his scienter.” The District Court for the Northern District of California has just rendered its decision. Did the Court take issue with the SEC’s application of this novel theory of shadow trading? Not so much. Indeed, the Court appears to treat the case as just another version of “misappropriation” of material nonpublic information. According to the Court, the SEC showed that there were “genuine disputes of material fact concerning (i) whether Panuwat received nonpublic information, (ii) whether that information was material to Incyte, (iii) whether Panuwat breached his duty to Medivation by using its confidential information to personally benefit himself, and (iv) whether Panuwat acted with scienter.” Accordingly, the Court denied Panuwat’s motion for summary judgment. In its Order, the Court reminded the parties to schedule a settlement conference. Will the parties settle? Or will this case go to trial?


In this paper, the authors describe “shadow trading” as “a novel, undocumented phenomenon that corporate insiders can use to circumvent insider trading regulations and SEC scrutiny. The premise of shadow trading is straightforward: private information held by insiders can also be relevant for economically-linked firms and exploited to facilitate profitable trading in those firms.” The authors contend that the “legality of shadow trading appears to be relatively untested due to the lack of a clear breach of fiduciary responsibility by insiders who use private information to facilitate trading in other firms. Indeed, in the U.S., prosecutions for shadow trading are virtually non-existent.” The study showed that shadow trading was “significantly higher when source firms do not prohibit employees from engaging in shadow trading relative to when they prohibit shadow trading. Although mostly untested in the U.S. judicial system, such company regulations arguably create a fiduciary responsibility for employees not to exploit their private information in economically-linked firms.”


As described in the Court’s Order, from 2014 to 2017, Panuwat was employed in business development at Medivation, where he was “responsible for finding, evaluating, and pursuing acquisition opportunities for Medivation,” a responsibility that involved “track[ing] developments in the biopharmaceutical industry.” In connection with his employment, he signed the company’s Insider Trading Policy and Confidential Information and Invention Assignment Agreement.

In March 2016, Medivation was approached with an unsolicited takeover offer from another company, which Medivation rejected. But the other company continued its pursuit. As a result, the Order states, Medivation’s board directed its investment bankers to explore strategic alternatives. As described in the Order, the analysis—both internal and external—resulting from that effort identified Incyte and Medivation as two of “the ‘very few’ midcap oncology assets” remaining in the industry at that time. There was also speculation by financial analysts about the impact of a Medivation acquisition on Incyte, which some viewed as likely positive. Although the market was aware that Medivation was engaged in a sale process, the details were confidential. According to the Order, Panuwat was involved in the strategic alternative search and analysis and was “often privy to confidential details about the sale process.” At one point during the process, he indicated to one of the bankers that Incyte was a comparable company and was “first in class.”

On August 18, 2016, Medivation’s CEO sent Panuwat and 12 other employees confidential information about Pfizer’s strong interest in a deal with Medivation, suggesting that a deal was imminent, including price terms. According to the Order, “[s]even minutes later, at 12:26 PM P.T., Panuwat started purchasing Incyte call options,” in amounts representing significant portions of the daily volume of those call options sold in the market. On Monday, August 22, the deal was announced, and Incyte’s stock price rose 7.7%. Panuwat made over $120,000.

Five years later, the SEC charged Panuwat with violation of Exchange Act Section 10(b) and Rule 10b-5. After losing a motion to dismiss, Panuwat filed for summary judgment. The Court noted here that it had granted the motion for leave to file an amicus brief filed by the Investor Choice Advocates Network. The amicus brief contended, among other things, that the SEC’s invocation of the novel “shadow-trading” theory made this a “major questions” case and that the SEC did not have clear authority to advance that theory. (See this PubCo post.) Citing U.S. v. O’Hagan, the Court stated that it “did not find either argument particularly persuasive and simply note[d] that this Order is not contrary to other courts’ decisions to refrain from issuing a blanket ban on trading based on nonpublic information…Every element of the misappropriation theory of insider trading must be met for the SEC to survive summary judgment.” (See this PubCo post.)


In U.S. v. O’Hagan, decided in 1997, SCOTUS upheld the misappropriation theory of insider trading. According to SCOTUS, under “the ‘traditional’ or ‘classical theory’ of insider trading liability, §10(b) and Rule 10b-5 are violated when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information….The ‘misappropriation theory’ holds that a person commits fraud ‘in connection with’ a securities transaction, and thereby violates §10(b) and Rule 10b-5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information.”

Under the misappropriation theory,

“a fiduciary’s undisclosed, self-serving use of a principal’s information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of that information. In lieu of premising liability on a fiduciary relationship between company insider and purchaser or seller of the company’s stock, the misappropriation theory premises liability on a fiduciary-turned-trader’s deception of those who entrusted him with access to confidential information. The two theories are complementary, each addressing efforts to capitalize on nonpublic information through the purchase or sale of securities. The classical theory targets a corporate insider’s breach of duty to shareholders with whom the insider transacts; the misappropriation theory outlaws trading on the basis of nonpublic information by a corporate ‘outsider’ in breach of a duty owed not to a trading party, but to the source of the information. The misappropriation theory is thus designed to ‘protec[t] the integrity of the securities markets against abuses by ‘outsiders’ to a corporation who have access to confidential information that will affect th[e] corporation’s security price when revealed, but who owe no fiduciary or other duty to that corporation’s shareholders.’”

The misappropriation theory, SCOTUS reasoned, “comports with §10(b)’s language, which requires deception ‘in connection with the purchase or sale of any security,’ not deception of an identifiable purchaser or seller.” SCOTUS agreed that “misappropriation, as just defined, satisfies §10(b)’s requirement that chargeable conduct involve a ‘deceptive device or contrivance’ used ‘in connection with’ the purchase or sale of securities.”


Under the Federal Rules of Civil Procedure, “summary judgment on a claim or defense is appropriate ‘if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.’” On summary judgment, the Court “draws all reasonable factual inferences in favor of the non-movant.” To survive summary judgment, the Court said, “the SEC must set forth affirmative evidence sufficient for a jury to find in its favor on each element of insider trading.”

Under Section 10(b), the Court explained, citing O’Hagan, “a person commits fraud ‘in connection with’ a securities transaction, and violates §10(b) and Rule 10b-5, ‘when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information.’” Citing 9th Circuit precedent in SEC v. Talbot, the Court stated that a “fiduciary’s ‘undisclosed, self-serving use of a principal’s information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of that information.’….A trader is therefore liable if he ‘knowingly misappropriated confidential, material, and nonpublic information for securities trading purposes, in breach of a duty arising from a relationship of trust and confidence owed to the source of the information.’”

According to the Court, “[f]or its misappropriation theory, the SEC must show that Panuwat ‘knowingly misappropriated confidential, material, and nonpublic information for securities trading purposes, in breach of a duty arising from a relationship of trust and confidence owed to the source of the information.’”

Materiality. To begin the analysis, the Court looked at whether Panuwat had received material, nonpublic information from Medivation. Examining first the issue of materiality, the Court noted that, in connection with mergers, materiality is weighed on the Basic v. Levinson probability/magnitude scale. The Court observed that information “about that security or issuer” does not need to come from the security or issuer of the security to be material; here, the SEC was not asking the Court to infer, as Panuwat contended, “that ‘because [he] was aware of confidential information regarding one biopharmaceutical company (Medivation), such information was material to some or all other allegedly similar biopharmaceutical companies.’” Rather, the Court reasoned, the SEC was asking the Court to “infer that because Panuwat was aware of confidential information about Medivation—information made available to him by receipt of the August 18 [CEO] Email—and because Medivation and Incyte were connected as part of a niche section of the biopharmaceutical market, Panuwat was aware of information that was material to Incyte.“

The Court found that there were factual disputes as to whether a “market connection” existed between Medivation and Incyte, a fact that would be critical for materiality. While Panuwat argued that there was no connection, that the two companies were not competitors and that the correlations between the two were only “generic,” the SEC showed that “analyst reports and financial news articles repeatedly linked Medivation’s acquisition to Incyte’s future.” In addition, Panuwat “concede[d] that he is a sophisticated investor.” Considering these facts in the light most favorable to the SEC, the Court concluded that “they support the SEC’s theory that a reasonable investor such as Panuwat—who paid careful attention to the biopharmaceutical market, and specifically to Incyte—could have perceived Medivation and Incyte to be connected in the market such that pertinent information about one was material to the other.” The SEC had also provided evidence that Medivation’s bankers considered Incyte to be a “comparable peer” to Medivation, information that a jury could also find contributed to materiality. Finally, the Court pointed to the 7.7% increase in Incyte’s stock price following announcement of the deal, a fact that “a jury could reasonably find that it was further indication of the two companies’ connection in the market.” The Court concluded that the SEC had shown a sufficient “connection between Medivation and Incyte” to allow a jury to find that a reasonable investor would view the CEO’s email “as altering the ‘total mix’ of information available about Incyte.”

Nonpublic. Next, looking at whether the information was nonpublic, the Court concluded that the SEC had shown that the information was “nonpublic and available to Panuwat because of his position with Medivation.” The Court highlighted that it was undisputed that Panuwat knew the identities of the bidders and their bids and that Medivation wanted to announce a final sale on Monday, August 22. In addition, the CEO’s email communicated that Pfizer was anxious to do the deal, along with details about timing and price. But the parties disagreed about whether the information was nonpublic and, notably, about whether Panuwat had even read the email. Panuwat contended that the public was aware of the sale process, including that a deal was likely in mid-August, pointing to various analyst and media reports. The SEC, however, argued that Panuwat misappropriated the “final details of the transaction—the final buyer, the final price, and the ultimate timing of the execution of the merger”—which Panuwat acknowledged were not yet public information when he received the CEO’s email. That information, the SEC contended was “more reliable” than the information known to the public, even though bids were still being submitted. According to the Court, that presented a “triable issue of fact”; a jury could find that “Panuwat knew more than the public about the Pfizer deal.” In addition, Panuwat contended that there was no evidence that he even read the CEO’s email: according to the Court, he said “that he did not forward the email or reply to it and that he does not remember receiving it.” The SEC argued that he was sending and receiving emails from work that day and did send various emails, including emails to Medivation’s bankers. The Court found that this presented an “obvious dispute” for a jury to consider.

According to the Court, that “Panuwat was familiar with Incyte, commented positively on the company earlier in 2016, but bought no stock in it until seven minutes after receiving an email that contained information about the Medivation’s price point, sale timeline, and purchaser, could be interpreted by a jury as suggestive of both materiality and misappropriation. There is enough evidence to create a material dispute that Panuwat received nonpublic information on August 18, 2016.”

Breach of duty. Next, the Court considered whether the SEC had established that Panuwat “breached ‘some fiduciary, contractual, or similar obligation’ to Medivation when he traded Incyte call options.” In O’Hagan, SCOTUS “observed that liability under the misappropriation theory arises when there is an expectation that the trading party will keep the source’s information confidential.” The Court concluded that there was evidence that Panuwat breached a duty under all three of the theories advanced by the SEC.

First, the SEC pointed to a duty arising from Medivation’s Insider Trading Policy, which described “inside information” as nonpublic information that the employee may receive in the course of employment “about the Company or about other publicly-traded companies with which the Company has business dealings.” Although Medivation did not have business dealings with Incyte, the Court reasoned that, because of the use of the word “including,” the list was not exhaustive. Pointing to the testimony of others indicating that the list was intended to be limited, Panuwat argued otherwise. But the Court found that the language of the policy allowed for the SEC’s interpretation, creating a dispute of material fact as to whether it prohibited trades like Panuwat’s Incyte trade. However, it was “sufficient,” in the Court’s view, “to support the breach of duty element of misappropriation that the SEC must prove.”

Second, the SEC contended that Panuwat “breached his duty under the Confidentiality Agreement to refrain from using Medivation’s confidential information for his own personal benefit.” Panuwat argued that the only evidence that he disclosed or used confidential company information for personal gain was the CEO email and subsequent trade, and that he did not disclose his trades. The Court found that to be “sufficient to support the theory….When considered in a light that is most favorable to the SEC, the facts could support a jury finding that Panuwat (a) owed Medivation a duty of confidentiality and trust that arose when he signed the Confidentiality Agreement, (b) obtained confidential information about Medivation’s sale process in the [CEO email], and (c) exploited that information for his personal benefit when he bought Incyte stock options seven minutes after reading the email, and later sold those options for a profit.”

Third, the SEC argued that there was a breach of the “duty of trust and confidence that was created when his employer, Medivation, entrusted him with confidential information.” Panuwat contended that his case was distinguishable from those cited by the SEC and that the evidence against him was only “circumstantial” and “weak.” The Court found otherwise. In Talbot, where the defendant traded on the basis of MNPI that he learned at a board meeting, the 9th Circuit found, even in the absence of a written confidentiality agreement or insider trading policy, that there was a breach of duty rooted in traditional principles of agency law. Here, the Court found a similar breach: “Panuwat’s duty arose from his employment with Medivation. He was entrusted with confidential information by Medivation. He breached his duty when he traded on it for his own personal benefit without disclosing that fact to Medivation.” Panuwat, the Court observed, simply called this theory a “red herring,” based on weak evidence. It will be up to the jury, the Court said, to resolve the strength of the evidence. Nor was it necessary that Panuwat have a ”recognized fiduciary duty” under the caselaw.

Scienter. The last question for the Court was whether the SEC had shown that “Panuwat acted with scienter when he allegedly traded based on MNPI he learned during the course of his employment with Medivation.” Courts in the 9th Circuit are split, the Court said, as to whether scienter requires a defendant to use, or simply be aware of, MNPI in carrying out the trade. Panuwat argued that the SEC failed to show that he used or was even aware of the MNPI. The Court had already determined that the SEC had shown enough for a jury to find that Panuwat received and read the CEO email, and the showing by the SEC that he initiated the trades seven minutes after receipt of the CEO email was, in the Court’s view, the “SEC’s strongest evidence” of scienter. The implications of his trading history were also in dispute. The Court also observed here that Panuwat had provided “inconsistent testimony about why he traded in Incyte,” which “tends to discredit him as a narrator of events surrounding the trade at issue.” Panuwat contended that the deal for Medivation was not complete at the time of his trade and that bidding continued afterward—which the Court accepted as “an argument.” However, citing Basic for the proposition that merger discussions do not have to be complete, the Court concluded that the argument was “not dispositive.”

The Court concluded that the SEC had “shown affirmative evidence sufficient to support a jury finding that Panuwat misappropriated MNPI.” Because there were “disputes of material fact pertaining to each element of misappropriation that preclude summary judgment,” the Court denied Panuwat’s motion. In the end, the Court reminded the parties to schedule a settlement conference.