A summary judgment motion in the shadow insider trading case was denied.
The Securities and Exchange Commission brought charges against Matthew Panuwat a business development executive at Medivation. Panuwat had learned from Medivation’s CEO that the company expected to be acquired by a major pharmaceutical company, Pfizer, within a few days, at a premium to the then-market price. Panuwat did not trade in Medivation securities. Rather, within minutes of hearing the news, Panuwat purchased out-of-the-money call options in Incyte Corporation, another oncology-focused biopharmaceutical company that he believed would increase in value when the Medivation acquisition was announced.
If Panuwat traded in Medivation’s stock or Pfizer’s stock, that clearly would have been insider trading.
But he didn’t trade in the stock in play. He traded in Incyte, a completely unrelated company that happened to be in the same industry and about the same size as Medivation. He bet that there would be increased interest in this space and the merger price of Medivation would float the value of similar companies.
The Securities and Exchange Commission thinks this should be considered insider trading and brought charges against Mr. Panuwat for his 2016 trade.
Mr. Panuwat brought a motion for summary judgement hoping to dismiss the charges based on the facts. The judge said there were genuine disputes of material fact concerning
The judge had previously ruled at the earlier motion to dismiss phase that information may be material to more than one company and that information does not need to come from the issuer of the security to be material. The SEC charges survived this facial attack on shadow insider trading.
- whether Mr. Panuwat received nonpublic information,
- whether that information was material to Incyte,
- whether Mr. Panuwat breached his duty to Medivation by using its confidential
information to personally benefit himself, and - whether Mr. Panuwat acted with scienter.
As for materiality:
“Changes in stock price after previously unknown information is disclosed to the market is “strong evidence” of how reasonable investors understand the significance of that information. … The SEC has shown that Incyte’s stock increased by 7.7% after the market learned that Pfizer acquired Medivation. See Oppo. Ex. P. Panuwat responds that Incyte’s stock prices had changed “by at least 7.7% in one day over 400 times during the time Incyte has been a publicly traded company.” … Again, it is possible that the stock price increase was unrelated to the Medivation sale. But a jury could reasonably find that it was further indication of the two companies’ connection in the market, and therefore probative of materiality. There is at least a material dispute whether the information Panuwat received in the Hung Email was material to Incyte.”
The judge found that Mr. Panuwat potential breached at least one of his three separate duties to not use this confidential information. The first was the Medivation insider trader policy that covered “securities of another publicly traded company”. Mr. Panuwat argues that Incyte was not one of the enumerated relationships in the policy. Second, Mr. Panuwat signed Medivation’s confidentiality agreement and the SEC argued that it created a duty with the Incyte information. Third, the SEC argues that there is a common law duty for an employee with regards to company information. The judge ruled that it was up to the jury to rule on potential breach.
The case is far from over. The question is whether Mr. Panuwat wants to continue fighting and has the financial resources to keep fighting the SEC charges.
Sources:
- Order Denying Motion for Summary Judgment
- SEC Charges Biopharmaceutical Company Employee with Insider Trading
- SEC Complaint
- An Unusual Insider Trading Case
- Using Inside Information About One Deal to Buy Shares of Another Firm
- Wachtell Lipton Discusses a New Variation in SEC Insider Trading Enforcement