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Shadow Insider Trading Decision
Factual Background:
- On April 5th, 2024, after an eight-day trial, a federal jury found Matthew Panuwat guilty of insider trading.
- Panuwat was an executive at Medivation, a publicly traded biotech company in the oncology space that was in the process of being acquired for a large premium to its current trading price. Upon learning this information, Panuwat traded in the stock of Incyte, a close competitor. The information Panuwat learned from his role at Medivation was deemed to be misappropriated MNPI.
Analysis:
- Panuwat’s conduct fulfilled the three prongs necessary to prove insider trading.
- Non-public: Information about Medivation being acquired for a premium was not in the public domain.
- Material: Panuwat’s information about Medivation substantially changed the mix of information that was otherwise available publicly.
- Duty: Panuwat owed a duty to Medivation because of his employment agreement which stated:
“During the course of your employment…with the Company, you may receive important information that is not yet publicly disseminated…about the Company. … Because of your access to this information, 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 publicly 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. …”
Takeaways:
- MNPI and Surveillance: In analyzing the implication of the Panuwat decision on investment managers, consider focusing on the requirements of Section 204A of the Investment Advisers Act which requires that investment advisers maintain policies reasonably designed to prevent the misuse of material nonpublic information. Therefore, advisers executing high-risk strategies may consider changing current MNPI practices, while others may consider a more incremental change. Some considerations include the following:
- Trading restrictions: Restricting trading in all publicly traded securities, specific high-risk industries, or adjacent companies. Adjacent companies could be identified by investment staff at the time of NDA signing or at the time of them obtaining MNPI.
- Gray lists: Flagging trades in specific industries, high-risk sectors, or adjacent companies for additional pre-trade review to ensure no trading on MNPI. Adjacent companies could be identified by investment staff at the time of NDA signing or at the time of them obtaining MNPI.
- Post trade surveillance: Post hoc reviews of trades in specific industries, sectors, or adjacent companies could allow for some remediation and place employees on notice that compliance is monitoring their activities. Adjacent companies could be identified by investment staff at the time of NDA signing or at the time of them obtaining MNPI.
- Additional training: Additional training on MNPI identification.
- Protecting Your Firm and Uncertainty: As in many MNPI cases, the ability of CCO to completely foreclose the possibility of insider trading is limited and instead adviser should focus on the reasonableness of their policies. That approach often prevents the adviser from becoming charged in rogue employee situations. For example, Medivation was not charged in the Panuwat matter.
- Non-Disclosure Agreements: Panuwat executed an agreement that specifically defined his duty to Medivation as including trading in other company’s public securities. Advisers may look for and remove similar language in their NDAs as a method to manage risk.
Shadow Trading Management Framework:
Indicia of Low Risk Strategies
- Many competitors / large markets;
- Smaller or middle market deals;
- No IP, low tech, diversified products.
Indicia of High Risk Strategies
- Few competitors / niche markets;
- Larger / publicly traded deals;
- IP-based, high tech, single product.