SEC tests insider-trading theory at trial of ex-Bay Area biotech executive
Securities traders and lawyers are closely watching the San Francisco case of Matthew Panuwat, the SEC’s first attempt to pursue so-called shadow trading.
By Rachel Graf | Bloomberg
A lawyer for the US Securities and Exchange Commission told a jury that a former biotech executive’s $120,000 windfall on a trade in a competing company’s stock was “like betting on a game when you know who’s going to win” because he knew the pending takeover of his firm would likely boost its rival.
The civil trial that began Monday in San Francisco will answer the novel question of whether buying or selling another company’s stock based on specialized industry knowledge constitutes insider trading.
Under Chair Gary Gensler, some critics have said that the regulator has stretched its enforcement powers far beyond its jurisdiction. Enforcement chief Gurbir Grewal has brought cases that have covered new territory for the securities regulator, including over a McDonald’s Corp. chief executive officer’s relationship with an employee and the workplace culture at a video-game developer. The agency also is waging several cutting-edge court fights to assert greater control over cryptocurrency.
Securities traders and lawyers are closely watching the San Francisco case of Matthew Panuwat, the SEC’s first attempt to pursue so-called shadow trading. It also underscores how Congress has never explicitly defined insider trading, leaving courts to decide when the SEC oversteps its authority.
In his opening argument, SEC lawyer Matthew Meyerhofer said Panuwat took advantage of being part of the “inner circle” at biomedical technology developer Medivation Inc. to make a lucrative bet on a likely deal.
Seven Minutes
Seven minutes after receiving an August 2016 email from Medivation’s CEO that said Pfizer Inc. was interested in acquiring it, Panuwat invested more than $117,000, or almost half of his annual salary, on call options in rival Incyte Corp., according to the agency.
Pfizer announced the $14 billion Medivation deal days later. By taking one mid-cap biopharma company off the market, the deal made Incyte a more valuable acquisition target, the SEC alleged in its suit against Panuwat.
Panuwat was a sophisticated trader who “knew exactly what he was doing,” Meyerhofer said.
“He made a high-risk, high-reward bet,” the SEC lawyer said. “Except it wasn’t risky for him because he knew what was going to happen.”
Panuwat’s attorney, Jack DiCanio, told jurors that the SEC won’t call any witnesses who have first-hand knowledge of why Panuwat made the trades that he did. DiCanio said Panuwat simply traded Incyte options because he believed they were undervalued.
“The evidence will show that the entire SEC case is an attempt to put thoughts in Mr. Panuwat’s head that were not there when he made the trades,” DiCanio said.
Intent to Defraud
DiCanio also argued that the trades weren’t based on confidential information because the merger had been covered publicly by the press. And the SEC can’t prove that Panuwat had an intent to defraud because he didn’t know it was illegal to trade in a company that wasn’t his employer and that didn’t conduct business with his employer.
The agency is arguing that Panuwat signed a confidentiality agreement that required him not to share or use information learned during his employment, as well as an insider trading policy that barred employees from profiting off material nonpublic information.
If the jury finds that Panuwat violated the insider trading policy, the verdict could have far-reaching implications since most businesses have some similar policy, said Northwestern Pritzker School of Law professor Alex Lee.
It could also prompt companies to revisit their insider trading policies and close any gaps, he said. Pfizer’s policy, for example, barred trading securities of customers, suppliers or other companies with which it “has or may be considering a relationship,” meaning that an employee likely could have traded a number of other stocks that benefited from stay-at-home orders during the pandemic based on internal knowledge about Pfizer’s Covid vaccine trials.
US District Judge William Orrick, who is overseeing the case, in November rejected Panuwat’s request for a ruling dismissing the case without a trial. Orrick said the SEC had sufficiently alleged that Panuwat received material, nonpublic information from Medivation and breached an agreement with his employer when trading the call options.
The case is Securities and Exchange Commission v. Panuwat, 21-cv-06322, US District Court, Northern District of California (San Francisco).
–With assistance from Austin Weinstein and Matthew Bultman.
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