On November 20, 2023, a federal district court in the Northern District of California declined to grant summary judgment to the defendant in SEC v. Panuwat, the first-ever enforcement action by the U.S. Securities and Exchange Commission (the “SEC”) based on the novel insider trading theory of “shadow trading”—the use of one company’s inside information to trade in securities of another, similarly situated, but unrelated company.  The court previously declined to dismiss the case, signaling a potential expansion of insider trading enforcement.  The court’s summary judgment decision provides further guidance as to what may constitute impermissible shadow trading ahead of a trial scheduled for March 2024.

The case centers on Pfizer’s acquisition of Medivation, an oncology-focused biopharmaceutical company.  The defendant, Matthew Panuwat, worked at Medivation and allegedly learned the acquisition was imminent when Medivation’s CEO emailed Panuwat and other employees about the status of the sale process.  Seven minutes later, Panuwat purchased call options in another oncology-focused biopharmaceutical company, Incyte, which he later sold for a profit.  In its January 2022 decision denying Panuwat’s motion to dismiss, the court held that the SEC had adequately pleaded each of the required elements under the well-established “misappropriation theory” of insider trading: materiality, breach of duty, and scienter.  In its recent summary judgment decision, the court held that the SEC had shown genuine disputes of material fact concerning each of those elements and elaborated on materiality and breach of duty for purposes of the shadow trading theory.Continue Reading Shadow Trading: With Trial Looming in SEC v. Panuwat, the SEC’s Latest Insider Trading Theory Takes Further Shape

In a recent decision showing how courts evaluate insider trading in the marital context, the First Circuit Court of Appeals affirmed a Massachusetts real estate investor’s conviction on insider trading securities fraud and related conspiracy offenses arising from his role in passing information he learned from his corporate insider wife to two of his friends.  The government’s theory of the case was that defendant Amit Kanodia violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 when he misappropriated material, nonpublic information obtained from his wife to whom he owed “a duty of trust and confidence that prohibit[ed] [him] from secretly using such information for [his] personal advantage.”  On appeal, Kanodia argued that there was insufficient evidence to show that a legal duty of trust and confidence arose between him and his wife because their marital relationship did not involve a history, pattern, or practice of sharing confidences.  The First Circuit, however, found that the government presented ample evidence for a jury to conclude that Kanodia and his wife shared confidences in the history of their marriage and also in their business and advisory relationships.  
Continue Reading First Circuit Considers a Spouse’s “Duty of Trust” to a Corporate Insider

In the months leading up to President Trump’s inauguration and even during his first 100 days in office, speculation has persisted on whether white-collar enforcement will continue to be robust and, if so, which areas will be targeted. Although Attorney General Jeff Sessions recently reinforced a general commitment to continue pursuing white-collar criminals in his remarks at the Ethics and Compliance Initiative Annual Conference, details remain sketchy.

In particular, it is unclear whether insider trading prosecutions will remain a priority given the current administration’s pro-business leanings. Although insider trading is considered to be a “bread and butter” type of white-collar prosecution, there has been little guidance whether that will hold steady. Adding to this uncertainty, several key leadership positions are still vacant at two crucial enforcers: the Securities and Exchange Commission (SEC), which is supposed to ensure that material, non-public information is not used for trading; and the U.S. Attorney’s Office for the Southern District of New York (SDNY), which has traditionally acted as a key gatekeeper in deterring insider-trading activity in light of its proximity to the nation’s financial markets. Specifically, the recently-confirmed Chairman of the SEC, Jay Clayton, has not yet appointed a new Enforcement Director, the majority of the SEC’s Commissioners are not in place, and a new SDNY U.S. Attorney has not even been named.

Despite this uncertainty, the SEC and SDNY federal prosecutor’s office have stayed the course in pursuing insider trading cases in these first 100 days.
Continue Reading The First 100 Days: Insider Trading Enforcement to Hold Steady?

Marking a rare loss for the Securities and Exchange Commission (SEC) in its favored administrative forum, SEC Administrative Law Judge (ALJ) James E. Grimes ruled against the agency on April 18, 2017, in In the Matter of Charles L. Hill, Jr.  Ironically, the SEC fought hard to keep the case in the administrative forum, after Respondent Hill filed an action in federal district court claiming the SEC’s “home court” forum was unconstitutional.  The district court enjoined the SEC, but the 11th Circuit vacated the district court’s order, and the case proceeded on the SEC’s administrative court.  There, the ALJ found the SEC’s circumstantial evidence not only to be insufficient, but fatally undermined by the credibility of witnesses who offered testimony favorable to Hill.
Continue Reading SEC Suffers Rare Loss in Insider Trading Case Before Agency Judge

The air of uncertainty was palpable as current and former members of the U.S. Securities and Exchange Commission’s (SEC) Division of Enforcement spoke at the Securities Regulation Institute’s 44th Annual Conference in Coronado, California earlier this week.  Important questions went largely unanswered about the impact of the recent resignations of both SEC Chair Mary Jo White and Enforcement Director Andrew J. Ceresney, and the future direction of the enforcement program under the new presidential administration and proposed SEC Chair Jay Clayton.  SEC Enforcement staff in attendance steered clear of prognostications, and instead used the conference as an opportunity to reiterate the agency’s ongoing enforcement initiatives and successes from the past year.
Continue Reading Uncertainty Looms Over SEC Enforcement Staff

For those watching in the trading world, the U.S. Supreme Court has confirmed that your friends can, indeed, pass on a gift of non-public information about a company that could leave you criminally liable for insider trading, even if they gain nothing concrete in return. This morning the Supreme Court released its unanimous opinion in

Since the financial crisis, the Securities and Exchange Commission’s enforcement activity has been the subject of much attention and debate. But depending on the results of pending litigation and agency proposals, the SEC’s enforcement activities could change significantly. Three key areas of potential change include insider trading, the SEC’s use of in-house tribunals, and enforcement resources.

1. Insider Trading Prosecutions.

As discussed in a prior post, in United States v. Salman, the Ninth Circuit affirmed that the requisite “personal benefit” for insider trader liability is established where an “insider makes a gift of confidential information to a trading relative or friend.” In so holding, the Ninth Circuit rejected the Second Circuit’s narrower holding in United States v. Newman that a “personal benefit” may only be inferred from a personal relationship where the exchange of information “represents at least a potential gain of a pecuniary or similarly valuable nature.”

The Supreme Court has granted certiorari in Salman to potentially resolve the circuit split regarding the “personal benefit” element of insider trading liability. (Notably, while the government filed a petition for certiorari in Newman, the Supreme Court denied it prior to granting Salman’s petition.) Earlier this month, Salman filed his brief in the Supreme Court, and the case is scheduled to be addressed during the Supreme Court term starting October 2016. The Supreme Court’s decision in United States v. Salman will undoubtedly affect the number and type of insider trading cases the SEC pursues, and will provide crucial guidance about the contours of insider trading liability.Continue Reading Three Key Challenges To the Future of SEC Enforcement

In an apparent circuit split that may well garner attention from the Supreme Court, a Ninth Circuit panel issued an opinion in United States v. Salman affirming that the requisite “personal benefit” for insider trading liability is established where an “insider makes a gift of confidential information to a trading relative or friend.”  In doing so, the Ninth Circuit rejected the Second Circuit’s narrower holding in United States v. Newman that a “personal benefit” may only be inferred from a personal relationship where the exchange of information “represents at least a potential gain of a pecuniary or similarly valuable nature.”  Notably, the Salman opinion owes its authorship to SDNY’s Judge Rakoff, who has previously questioned the Second Circuit’s decision in Newman, and now–when sitting by designation–adopts a view in tension with his home Circuit.
Continue Reading 9th Circuit Rejects Newman Holding on Insider Trading

Recent court filings have confirmed that the U.S. Department of Justice and the Securities and Exchange Commission are continuing to conduct parallel criminal-civil investigations involving insider trading on Capitol Hill.  Most notably, DOJ and the SEC allege that a Congressional staffer provided a lobbyist with information regarding healthcare reimbursement- rate policy, and that the lobbyist leaked the information to Height Securities LLC, a privately held broker-dealer.  The investigation has grown to implicate 44 investment funds, including some of the nation’s largest hedge funds and asset-management advisors. Until 2012, it was somewhat ambiguous whether criminal and civil penalties against insider trading covered material nonpublic information disclosed by federal lawmakers and their staffs.  As Robert Khuzami, the Securities and Exchange Commission’s former Director of Enforcement had conceded, extending insider trading law to the legislative process had no “direct precedent.”  In theory, uncertainty regarding insider trading law’s tenuous reach over Capitol Hill ended on April 4, 2012, when Congress enacted the Stop Trading on Congressional Knowledge Act (the “STOCK Act”). 
Continue Reading Criminalizing Insider Trading from Wall Street to K Street: Taking Stock of the STOCK Act

In the months following revelations about the potentially-unfair advantages created by high-speed trading, SEC Chairman Mary Jo White announced that the SEC intends to develop rules to target high-speed trading in order to quell concerns that the practice allows traders to manipulate the market by, among other things, “front running” other traders. The SEC is not the first agency to set its sights on high-speed traders.  Among those looking into the practice, New York Attorney General Eric Schneiderman and United States Attorney General Eric Holder have announced investigations.  More recently, Schneiderman brought suit against Barclay’s, alleging that it gave high-speed traders an unfair advantage in its private securities trading venue.  But while prosecutors appear to have strong medicine in mind, the SEC is aiming for a more measured approach.  
Continue Reading SEC Announces Development of Rules to Oversee High-Speed Trading