On August 17, 2021, the U.S. Securities and Exchange Commission (SEC) filed a litigated complaint against a former employee of a biopharmaceutical company for trading in a peer company’s stock in advance of an announced acquisition of his employer. The SEC’s complaint alleges that — minutes after learning that his company would be imminently acquired and days before the news was publicly announced — the employee purchased short-term, out-of-the-money stock options of the peer company (sometimes referred to as an “economically-linked” company) whose value he anticipated would materially increase upon the announcement. The SEC alleges that the employee traded based on material non-public information (MNPI) he learned in the course of his employment and in breach of a duty of confidentiality to his employer.
This action serves as a reminder that the SEC is willing to apply theories of insider trading and the element of materiality to novel fact patterns. Here, that means bringing charges where an insider trades in securities of a company that is neither the entity to which the duty of trust and confidence was owed, nor a company potentially involved with that entity (such as a merger target), but a company that is somehow economically linked, such as a peer or competitor company. This article suggests steps for companies and fund managers to consider in the wake of this recent enforcement action, including reviewing policies and procedures and conducting updated employee training to address risks associated with trading securities of economically-linked companies.
SEC v. Matthew Panuwat
On August 17, 2021, the SEC charged Matthew Panuwat (Panuwat), a former employee of mid-cap, oncology-focused biopharmaceutical company Medivation Inc. (Medivation) with insider trading in securities of a peer company in advance of the company’s announcement that it would be acquired. In its complaint, filed in the Northern District of California, the SEC alleges that Panuwat served as Senior Director of Business Development at Medivation, where he was involved in finding, evaluating, and pursuing strategic opportunities, including actual or potential acquisitions and other company transactions. The SEC alleges that Panuwat owed Medivation a duty of trust and confidence pursuant to an employment agreement and the company’s insider trading policy, which stated: “you may be in a position to profit financially by buying or selling or in some other way dealing in the Company’s securities … or the securities of another public traded company, including all significant collaborators, customers, partners, suppliers or competitors of the Company …. For anyone to use such information to gain personal benefit … is illegal.”
According to the complaint, Panuwat allegedly received a wide range of MNPI in the course of his employment with Medivation. Panuwat is alleged to have had, among other things, information from investment bankers about peer companies, that large-cap pharmaceutical companies were interested in acquiring mid-cap oncology-focused biopharmaceutical companies, and that Medivation and a peer company were two of the only remaining potential targets. Panuwat was also aware that prior announcements of similar acquisitions had resulted in the material increase of the stock prices of both Medivation and the peer company.
The SEC alleged that the information concerning Medivation’s imminent acquisition was material not only to Medivation, but also to the peer company. According to the complaint, Medivation’s undisclosed acquisition would have been viewed by a reasonable investor in Medivation or the peer company as having significantly altered the total mix of information made available.
In August 2016, Medivation’s CEO sent Panuwat and others an email stating that Medivation would be imminently acquired. Within minutes, and from his work computer, Panuwat purchased out-of-the-money, short-term stock options in the peer company, the comparable company whose value he anticipated would materially increase upon the public announcement of the acquisition. According to the complaint, the peer company’s stock price rose materially upon announcement, and Panuwat profited in the amount of $107,066.
Key Takeaways
This litigated enforcement action is consistent with other indications that SEC Chair Gary Gensler will be taking a more aggressive stance on insider trading. In June 2021, Gensler publicly expressed concern about potential abuses of the Securities Exchange Act Rule 10b5-1, which provides an affirmative defense from insider trading for corporate insiders and companies to buy and sell company stock under trading plans, and has included proposed amendments to the rule in the SEC’s 2021 Annual Regulatory Agenda. Also this month, Gensler announced the appointment as the new Deputy Director of the Division of Enforcement Sanjay Wadhwa, former Associate Director in the SEC’s New York Regional Office, who has supervised high-profile cases against hedge funds for insider trading.
While there is no one-size-fits-all approach to addressing MNPI risks, and MNPI policies and procedures must take into consideration the nature of your business, below are some items to consider in the wake of this most recent action:
- assessing the adequacy of procedures to address whether confidential information learned about an issuer is material and subject to non-disclosure or confidentiality agreements with the source of the information
- determining whether MNPI that an employee has received provides insight into economically-linked companies and the risks that may create for other trades
- assessing the adequacy of policies and procedures for addressing MNPI risk based on the nature of your business, including sufficiency and review of any information barriers, restricted lists, and documentation of the rationale for certain trades
- periodically testing your policies and procedures for accuracy and effectiveness
- conducting renewed MNPI training for all employees with a focus on trading on the basis of MNPI in the stock of companies other than the information source
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