SEC wins novel ‘shadow trading’ trial against biopharma executive

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On April 5, 2024, the U.S. Securities and Exchange Commission (SEC) succeeded in its much-watched civil action against Matthew Panuwat, a former business development executive at Medivation Inc., a midcap biopharmaceutical company. The SEC’s complaint [PDF] raised a novel theory of insider trading known as “shadow trading”. Shadow trading involves the use of material non-public information (MNPI) about a reporting issuer to profit from trading the shares of a different, but “economically linked,” company. This case was unique in that the defendant was found liable for using information obtained about Pfizer Inc.’s acquisition of Medivation (the acquired), to profit from trading securities of Medivation’s competitor (the competitor) when the Pfizer acquisition (the acquisition) had not yet been publicly announced.

In this case, the SEC alleged that the defendant contravened section 10(b) of the Securities Exchange Act of 1934 [PDF] by acquiring securities of the competitor, on the basis that the acquisition would also result in a corresponding increase in the competitor’s share price. The SEC alleged that the impugned trading resulted in the defendant making a profit of US$107,066.


The SEC alleged that the defendant bought short-term, out-of-the-money stock options (call options) in the competitor when he knew that the acquisition was on the verge of being finalized, but had not yet been publicly disclosed. The defendant, who was involved in the sale process, was found to have purchased the competitor’s options within minutes of learning confidential information about the potential acquisition. The SEC also alleged that the defendant knew that investment bankers in the bid process had referenced Incyte as a comparable company to Medivation and that Panuwat anticipated that Incyte’s share price would also increase following Pfizer’s takeover of Medivation. The SEC further argued that Medivation’s insider trading policy prohibited employees in Panuwat’s position from using confidential information acquired through their employment to trade in the securities of another publicly traded company. According to the complaint, the Incyte call options increased in value when news of the Pfizer takeover became public, resulting in a profit of US$107,066.

The SEC’s claim against the defendant was the first time that the SEC has attempted to expand insider trading enforcement to this type of “shadow trading”. The defendant brought a motion to dismiss the action, arguing that the SEC’s claim was deficient because (i) the SEC did not allege that the defendant had knowledge of MNPI about the issuer in whose securities he traded; and (ii) the SEC’s allegation expanded insider trading liability in a novel way without legislation or rulemaking, thus failing to provide adequate notice to market participants of the increased scope of prohibited conduct under the law.

The SEC’s “shadow trading” theory survived the defendant’s motion to dismiss the claim. The U.S. Federal Court rejected the defendant’s arguments, and found that the SEC sufficiently alleged that (i) the information about the acquisition was material, confidential and nonpublic at the time of the defendant’s trading; (ii) that trading was a breach of the defendant’s fiduciary duties and in violation his employer’s insider trading policy; and (iii) the SEC sufficiently pled "scienter" in their allegation that the defendant used the MNPI in an attempt to profit off of acquiring call options in Incyte.

At trial, the jury deliberated for just over two hours, and determined that the defendant was liable for insider trading, rendering a verdict in favour of the SEC.

Key implications

Canadian market participants should consider whether this “shadow trading” theory of insider trading liability could make its way north of the border.

There are certain fundamental differences between insider trading liability in the U.S. in comparison to Canada that are important to remember when considering whether Canadian regulators would seek to initiate a proceeding based on an allegation of “shadow trading”. Notably, under U.S. law, there is no statutory framework for insider trading liability other than the anti-fraud provisions of the federal securities laws. A person may be guilty of insider trading by trading in circumstances where they breach a duty owed to the company or have misappropriated confidential information that is considered the property of someone else. In all cases, however, a guilty mental state must be established, such as an intention to gain an improper benefit.

Conversely, in Canada, insider trading laws are defined more clearly with detailed rules. For example, under section 76(1) of the Ontario Securities Act, Staff of the Commission must prove that a respondent was in a “special relationship” with the issuer and in possession of MNPI at the time of making the trades. However, there is no requirement that the Commission prove that the respondent deliberately intended to profit off of their knowledge of MNPI.

Different results could arise under the securities laws of Canadian provinces if facts similar to the Panuwat case come before a provincial securities commission or tribunal. Most significantly, in Québec, “shadow trading” is expressly prohibited by section 189.1 of the Securities Act (Québec). It provides, among other things, that no person may use MNPI about one issuer to trade in the securities, options or derivatives of another issuer, if “their market prices are likely to be influenced by the price fluctuations of the issuer’s securities”.[1]

In Ontario and most other provinces of Canada, “shadow trading” is not explicitly prohibited by existing insider trading laws. However, this recent decision does raise the question of whether a Canadian securities regulator would ask the commission or tribunal to exercise its residual public interest jurisdiction[2] to find that conduct that is not a specifically identifiable violation of securities law may nonetheless warrant regulatory enforcement in the public interest. A case found to be merely contrary to the public interest alone in Ontario does not attract an administrative penalty or disgorgement.[3] However, significant non-monetary sanctions, including a director/officer ban and trading prohibitions, could be imposed.

The novel decision relating to “shadow trading” in the United States raises important questions regarding the scope of conduct that can be, or should be, regulated as insider trading in Ontario and other provinces of Canada, particularly in light of the statutory prohibition against “shadow trading” that is already in effect in Québec. These questions may lead Ontario and other provinces to consider the adoption of statutory amendments to prohibit this type of trading, as Québec has already done, or to explore novel applications of their public interest jurisdiction to achieve a similar result. Interestingly, although the U.S. anti-fraud approach to insider trading regulation is sometimes criticized for its lack of clearly codified rules, this decision shows the potential flexibility of that approach for the SEC to develop new tools to foster investor protection and market integrity.

[1] Securities Act (Québec), CQLR c V-1.1, 1982, c. 48; 2001, c. 38, s. 1, s. 189.1.

[2] See, for example, Securities Act (Ontario), R.S.O. 1990, c. S.5, s. 127 (Ontario Act).

[3] Ontario Act, s. 127(1) 9, 10.