A recent shadow insider trading case has broad implications for public companies and their employees. In the case SEC v. Panuwat, a company employee was found liable for insider trading under unique circumstances. Normal insider trading cases against an employee involve trading securities of the employer’s company based on material non-public information (MNPI). Here, the defendant, Matthew Panuwat was found liable for trading the securities of another company.

Shadow insider trading refers to a scenario in which an insider has MNPI about Company X, but trades in the securities of Company Y. Company X and Company Y must share some notable market connection, such as being competitors in the same industry.

Matthew Panuwat worked in business development at Medivation, a biopharmaceutical company. In this role, he closely monitored the stock prices and M&A activity of peer biopharmaceutical companies. According to the SEC’s complaint, Panuwat had access to confidential information that Medivation would be acquired by Pfizer. Just minutes after learning about this acquisition, he purchased short-term call options in another peer company called Incyte. Panuwat correctly deduced that the Pfizer acquisition would have a positive impact on the stock price of Incyte. Within a few days of the acquisition announcement, Incyte’s stock price increased 7.7%. Panuwat ended up making a significant profit on the trade.

The SEC argued that there was a “market connection” between the two companies and that Panuwat had misappropriated MNPI. Traditionally, the misappropriation theory of insider trading covers the misappropriation of confidential information as being a breach of the duty of trust to the information’s source. This case extends the misappropriation theory to apply to a breach of confidence impacting another company in the same industry. The SEC asserted that Medivation’s insider trading policy also applied to “the securities of another publicly traded company, including all significant…competitors of the Company.”

The case was ultimately decided in favor of the SEC by a California federal jury following an eight-day trial. Following the decision, the SEC’s Enforcement Director Gurbir Grewal emphasized that there was “nothing novel about this matter” and that this was “insider trading, pure and simple.”

The outcome of this case creates additional complications for public companies in monitoring insider trading activities. SEC Rule 10b-5 and Section 10(b) of the Securities Act of 1933 prohibit the use of any devices intended to defraud or deceive others in connection with a securities trade. If other courts follow SEC v. Panuwat and interpret Rule 10b-5 to apply to shadow insider trading, companies will face greater potential enforcement risks resulting from the activities of their employees.

Companies should reexamine their insider trading policies and see whether any clarification language should be added to adequately cover shadow insider trading scenarios. Compliance departments should also conduct trainings that educate employees about the implications of shadow insider trading. Companies can also invest in enhanced monitoring systems to better track the trading activities of their employees and detect suspicious patterns.