SEC Win Expands Boundaries of Insider Trading

In a client alert, attorneys from law firm Morrison Foerster say SEC v. Panuwat was an important test case for the SEC, and that with the SEC’s now clarified interest in so-called “shadow trading” central to the allegations, companies should review their insider trading policies.

In SEC v. Panuwat, a jury in federal court in the Northern District of California found the defendant liable, even though the alleged infraction involved trading securities of a company other than the one where he was employed. 

The defendant in Panuwat was alleged to have surmised that a pending acquisition of the company where he was employed would result in the increased valuation of another company. He is alleged to have purchased securities in that company just minutes after being told by his CEO about the pending acquisition. The stock price of the other company did increase, and he is said to have made more than $100,000 in profits from options he had purchased.

Among the key takeaways from Panuwat, according to the MoFo attorneys, is that when companies formulate their insider trading policies, they should take into account the competitive landscape of the industry sector in which they operate. More broadly, a company should establish processes “to enforce the full scope of its insider trading policy, monitor potential violations, and train employees and agents on compliance.”

The writers note that no criminal case based on shadow trading has yet been brought, but they say the verdict in this case could cause authorities to consider it.