SEC Survives Challenge in First Action Alleging “Shadow Trading"

SEC Survives Initial Challenge in First Enforcement Action Alleging ‘Shadow Trading’


On January 14, 2022, the US District Court for the Northern District of California denied an individual defendant’s motion to dismiss in SEC v. Panuwat, an insider trading case accusing a former pharmaceutical company employee of trading in a competitor’s stock ahead of a merger. This novel US Securities and Exchange Commission (SEC) enforcement action involves “shadow trading”—using inside information relating to one company to trade the stock of a separate, but comparable, company.

In Depth

According to the SEC’s complaint, Matthew Panuwat was the senior director of business development at a mid-sized biopharmaceutical company. Panuwat allegedly purchased short-term stock options in a competing company in the same industry a few days before his employer announced its acquisition by a global pharmaceutical company. Panuwat allegedly learned that investment bankers had identified the comparable company as part of its analysis, and he anticipated that the acquisition would lead to an increase in the competitor’s share price. Following the announcement of the acquisition, the competitor’s share price rose approximately 8%, and Panuwat’s trades allegedly generated profits of $107,066.

This action is the first time the SEC has tried to extend the “misappropriation theory” of insider trading to trading in the securities of one company while in possession of material nonpublic information about another comparable company. Under the misappropriation theory, a person violates the law when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. Here, the court held that the SEC adequately pled that the information about the acquisition was nonpublic, confidential and material to the competitor; that Panuwat breached his duty to his employer by using information to purchase the stock options; and that he acted with the requisite scienter.

With respect to the SEC’s breach of duty claim, the court focused on the language of the employer’s insider trading policy. The complaint alleges that the policy broadly prohibited trading in “the securities of another publicly traded company, including all significant collaborators, customers, partners, suppliers or competitors.” The court found that the word “including” does not limit the policy’s applicability to only the types of companies listed but is simply illustrative of the types of companies it covers.


  • The SEC will perceive this ruling as a win, and the case may encourage the agency’s staff to pursue other related or novel theories for insider trading liability. The court ruling no doubt will embolden the SEC as it considers future cases.
  • Public companies may want to review their insider trading policies. Recently, the SEC proposed amendments to Rule 10b5-1 under the Securities Exchange of 1934. The proposed rules require public companies to disclose in their insider trading policies and procedures their annual reports. If they have not adopted insider trading policies and procedures, the proposed rules require that companies disclose why not. The SEC explained that specific disclosures concerning insider trading policies will benefit investors by enabling them to evaluate the extent to which those policies protect shareholders from the misuse of material nonpublic information. In Panuwat, the court focused on the precise language in the insider trading policy, holding that the broadly worded policy prohibited trading in the securities of another company. The court did not resolve whether “shadow trading” would be unlawful absent an explicit policy prohibiting the conduct. The SEC’s focus on shadow trading may mean that the specific prohibitions in a company’s policy may come under greater scrutiny.
  • Public companies should also be mindful of the heightened risk faced by individual officers, directors and employees in this environment. SEC investigations can be costly and disrupt the work of key personnel. Dedicated execution of reasonably designed policies and procedures in this area can protect those executives and the company itself.