January 20, 2022

"Shadow Trading" Case Survives Defendant's Motion to Dismiss

Holland & Knight SECond Opinions Blog
Jessica B. Magee
Gavel and scale resting on desk

The U.S. District Court for the Northern District of California in SEC v. Panuwat, a case we discussed in a previous blog as having significant repercussions for insider trading enforcement in fiscal year (FY) 2022, just issued its decision denying defendant Matthew Panuwat's motion to dismiss.1

As a refresher, the SEC charged Panuwat with insider trading in connection with his purchase of call options in Incyte Corporation (Incyte) after he learned of confidential merger discussions between his company, Medivation Inc. (Medivation), and a separate third party. According to the SEC's theory of the case, Panuwat engaged in insider trading – under the misappropriation theory – by 1) knowingly misappropriating confidential information regarding a pending merger 2) in breach of a duty he owed to Medivation 3) to purchase Incyte stock.2 For a more in-depth discussion of the facts of this case, see our prior SECond Opinions Blog ("The Future's Best Predictor: What Can FY2021 Insider Trading Actions Tell Us About FY2022," Jan. 18, 2022).

In his motion to dismiss, Panuwat claimed that the "SEC ha[d] overstepped its enforcement authority" in filing the action.3 Though he made a number of arguments in support of the motion, the most compelling of those, in our opinion, fell into two camps.

First, Panuwat argued that the information he possessed about his company's merger was immaterial and the SEC's theory of insider trading did not fit within the specific language of Exchange Act Rule 10b5-1(a), which prohibits trading in the securities of an issuer on the "basis of material nonpublic information about that security or issuer."4 In other words, because the SEC did not allege Panuwat had possessed any confidential information about Incyte when he purchased the securities, he could not have engaged in insider trading.

Second, Panuwat asserted that the SEC failed to allege he possessed the requisite scienter because allegations that he "used" the information about Medivation's merger to purchase securities in Incyte lacked the requisite specificity.5 Essentially, Panuwat contended the SEC's allegations were too circumstantial to support a conclusion that he purchased stock options in Incyte based upon confidential information he received through his employment.

The judge was unmoved by Panuwat's arguments.

Regarding Panuwat's immateriality argument, the court reasoned that information can be material to more than one company and a violation occurs if one trades on material nonpublic information in "any security."6 The court held that "Section 10(b) and Rule 10b-5 cast a wide net, prohibiting insider trading of 'any security' using 'any manipulative or deceptive device.'"7 Further, the court did not view the language in 10b5-1(a) as exhaustive, focusing on the introductory "include, among other things" clause in the rule to find that the language of the rule is illustrative as opposed to restrictive. In what appears to be an outright endorsement of the agency's shadow trading theory – at least at a conceptual level – the court held "[i]f information may be material to more than one company…it follows that it may be material to more than the two companies specifically engaged in the transaction."8 Taking the allegations in the complaint as true, the court found that the SEC properly alleged the information regarding the Medivation merger was material with respect to Incyte.9

Next, the court agreed that the SEC sufficiently alleged Panuwat acted with scienter when he traded in Incyte's stock.10 Although the court seemingly side-stepped the question of whether, to establish scienter, a defendant in the U.S. Court of Appeals for the Ninth Circuit needs to actually "use" the information to carry out the trade as opposed to simply being "aware of" the information,11 the court concluded that the SEC's allegations satisfied either test within the standard for deciding a motion to dismiss. Moreover, the court found that the SEC adequately pleaded circumstantial evidence of how Panuwat used the information, including how he allegedly 1) traded within minutes of receiving the confidential information, and 2) had never previously traded in Incyte.12 Taken together, the court decided – for purposes of pleading sufficiency – these facts supported allegations that Panuwat used material nonpublic information to purchase out-of-the-money call options in Incyte.13

It is important to note that the court's findings came in the context of a motion to dismiss, whereby, under well-settled case law,14 the SEC's allegations are taken as true and must meet the heightened pleading standard for fraud claims pursuant to Federal Rule of Civil Procedure 9(b). However, aspects of the court's holding reveal an endorsement of the agency's novel shadow trading theory, which may have significant repercussions. Furthermore, orders denying a motion to dismiss are not appealable unless the district court certifies its order for an interlocutory appeal.15 To do so under 28 U.S.C. §1292(b), there must be a controlling question of law to which there is substantial ground for difference of opinion and an immediate appeal may materially advance the termination of the litigation. Absent an interlocutory appeal, the court's decision could prove to be the guidepost on shadow trading cases for the foreseeable future. The SECond Opinions Blog will continue to monitor the case and provide important updates as it proceeds.


1 See Order Denying Motion to Dismiss, SEC v. Panuwat, Case No. 4:21-cv-06322-WHO (N.D. Cal. Jan. 14, 2022), ECF No. 26.

2 See Complaint, SEC v. Panuwat, Case No. 4:21-cv-06322-WHO (N.D. Cal. Aug. 17, 2021), ECF No. 1.

3 Defendant's Motion to Dismiss at 1, SEC v. Panuwat, Case No. 4:21-cv-06322-WHO (N.D. Cal. Jan. 12, 2022), ECF No. 18.

4 Id. at 9–10; see also 17 C.F.R. § 240.10b5-1(a). (emphasis added).

5 Defendant's Motion to Dismiss at 13, SEC v. Panuwat, Case No. 4:21-cv-06322-WHO (N.D. Cal. Jan. 12, 2022), ECF No. 18.

6 Order Denying Motion to Dismiss at 7, SEC v. Panuwat, Case No. 4:21-cv-06322-WHO (N.D. Cal. Jan. 14, 2022), ECF No. 26. (emphasis in original).

7 Id. at 7 (emphasis in original).

8 Id. 

9 Id. at 8.

10 Id. at 11.

11 Id. at 10.

12 Id.

13 The court also denied Panuwat's challenge that to let the SEC's alleged misappropriation theory proceed would violate his due process rights. Although the court conceded that "there appear to be no other cases where the material nonpublic information at issue involved a third party," the court found that the theory of liability fell "within the general framework of insider trading, as well as the expansive language of Section 10(b) and corresponding regulations." Id. at 12. Notably, the court found that two important checks exist on liability for insider trading: materiality and scienter. Id. at 13. 

14 See Ashcroft v. Iqbal, 556 U.S. 662, 676 (2009); and see Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

15 See 28 U.S.C. § 1292.

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