Skip to content
Best Practices Employee Conflicts of Interest Insider Trading Regulations

Shadow Trading Confirmed!!! Are You Ready???

On Friday, April 5, 2024, a San Francisco jury found Matthew Panuwat guilty of insider trading.1 Why is this case important? Because it is the U.S. Securities and Exchange Commission’s (“SEC”) first successful so-called “Shadow Trading” conviction and now joins the ClassicalMisappropriation and Tipper/Tippee Theories of insider trading. 

Deliberation took less than three hours after an 8-day trial. The jury determined that Panuwat owed a duty of “trust, confidence or confidentiality” to his employer, possessed material nonpublic information (“MNPI”), used that information to purchase securities and “acted recklessly” in doing so.  

The SEC made a point of saying that “there was nothing novel about this (case) …this was insider trading, pure and simple.”  

Whether that is true or not, the facts of this case remain, Panuwat used (“MNPI”) about an impending announcement of the acquisition of the biopharmaceutical company (Medivation) he worked for to trade ahead of the news for his own benefit.  


What is unique about this case, is rather than buying the securities of Medivation, Panuwat used his knowledge to purchase a large stake via call options of a comparable public company (Incyte Corporation), whose share price rose materially upon the announcement of the deal – thus the Shadow Trading moniker. 

Not surprisingly, the SEC is seeking a fine of up to three times Panuwat’s trading gain and to bar him from serving as an officer or director of any public company.  


Based on this case, the SEC is likely to take what it has learned to pursue other suspected “shadow trading” instances where it believes there is sufficient evidence of a correlation between the performance of two companies’ securities and the presence of MNPI.  


Whether you believe the SEC proved the Shadow Trading case or not, market participants now have a new legal theory to worry about.   

As the law firm Proskauer2 observed, it would be wise to review nondisclosure agreements, engagement letters and contracts to determine if there are contractual duties to the source of the MNPI, as those agreements could limit the use of MNPI obtained pursuant to those agreements or covers securities of third-party issuers. A company, fund or individual thus could conceivably be viewed as engaging in “shadow trading” under the misappropriation theory if it trades a third-party company’s securities while subject to an agreement that specifically prohibits trading the securities of other companies. A “shadow trading” issue might arise even under an agreement that more broadly prohibits the use of MNPI for any purpose other than that of the agreement. 

Proskauer goes on to say that the Panuwat case should also cause prospective traders to think about the scope of any duties that might apply to them – and that they therefore might breach if they trade on MNPI. The court concluded in its summary judgment ruling that three independent duties could apply to Panuwat: (i) his duties under Medivation’s Insider Trading Policy, which prohibited trading “the securities of another publicly-traded company” based on MNPI obtained through his Medivation employment, (ii) his duties under Medivation’s Confidentiality Agreement, and (iii) his common-law employment duties, which imposed “a duty of trust and confidence” on him when he was entrusted with confidential information, and which prohibited him from using that information for his personal benefit “without disclosing that fact to” his employer. 

This is an opportune time for market participants to take stock of their insider trading, restricted lists and information barrier policies, procedures and controls. Star is here to help firms monitor employees and firm trading for all types of insider trading, including Shadow Trading.  

1 Star previously wrote about this case. See: Shadow Trading: How to Monitor For This New Compliance Risk 

2 Proskauer – “SEC Wins Insider-Trading Suit Alleging “Shadow Trading”