Case casts ‘shadow’ over private funds

Unproven theory may make firms hostage to their own P&Ps, side agreements.

A first-of-its-kind insider trading case against a pharma executive who bought shares in a rival firm ought to send private fund advisers scurrying to their compliance manuals and scrubbing outside agreements to tighten up their policies and procedures, experts tell affiliate title RCW.

Whatever else happens to him, Matthew Panuwat will go down in history as the first-ever defendant in a “shadow trading” case. The SEC says Panuwat, then the head of development at mid-sized oncology company Medivation, invested in one of Medivation’s competitors days before Medivation announced it was being acquired by drug titan Pfizer.

The Commission’s case hangs entirely on Medivation’s policies and procedures. They forbade executives such as Panuwat from trading not only Medivation stock but also shares “of another publicly traded company.” Panuwat knew that Medivation’s sale would make rival firm Incyte the next likely target of what was then a bonanza in cancer-treatment company acquisitions, and he illegally profited from that knowledge, the SEC claims.

The case is potentially a new front in the Commission’s decade-long war on insider trading. Private fund advisers would do well to prepare themselves for the new reality of third-party liability for enforcement cases, experts say.

‘Beyond two sides’

“This case is a big a deal because the SEC is either stretching the bounds of insider trading law as we know it or is trying to establish a new theory of insider trading,” says Kurt Wolfe, counsel to Quinn Emmanuel. “In-house compliance and legal teams should take note. The SEC is only able to bring these charges because they can point to a purported duty that exists under one company’s broad policy.”

Last year, the Commission issued its first-ever risk alert for private fund advisers. Among its findings: Firms had to do a better job not just of preventing insider trading, but also managing risks against material, non-public information seeping out. If the Panuwat case is prologue, those risks just got wider.

“It shows that the SEC means to construe its enforcement powers broadly,” says Philip Moustakis, partner in Seward & Kissel’s New York office. “It’s an unproven legal theory so far, but shadow trading expands the risk of MNPI well beyond two sides in a deal.”

Among other things, shadow trading enforcement may make funds hostage to the kind of outside agreements they routinely sign, Moustakis says.

“It may create a duty wider in scope than refraining from transacting in the securities of the counterparty issuer,” he says. “Managers should assess whether their business or any of their strategies involve the receipt of nonpublic information through confidentiality or non-disclosure agreements, by serving on boards, participating in creditors’ committees, or otherwise that may be deemed material not just for the relevant issuer but any economically-linked companies, public or private.”

The shadow knows

Medivation had been the subject of a ferocious bidding war in 2016. On August 22 of that year, the company announced that Pfizer had won the war with a $14 billion offer. The SEC claims that Panuwat had learned about the pending announcement four days earlier, when then-Medivation CEO David Hung sent an e-mail around saying that Pfizer had “expressed overwhelming interest.”

Within minutes of getting that e-mail, regulators claim, Panuwat logged onto his personal brokerage account and bought 578 call options in Incyte. Panuwat knew that once the Pfizer news broke, Incyte would be the next enticing target for a buyout. When Medivation announced the Pfizer deal on August 22, 2016, the price of shares in Incyte and several other mid-cap pharma companies spiked, regulators claim.

The dotted line

None of those facts add up to insider trading on their own. But when he took the job at Medivation, Panuwat had signed the company’s insider trading policies. Those policies were written broadly. Panuwat fell into the gap, regulators claim.

Medivation’s P&Ps warned him he’d likely come upon MNPI in his job. Medivation took it a step further, though. “Because of your access to this information,” the P&Ps state, “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.”

Such behavior, Medivation’s P&Ps warned, was “illegal.” Those lines, regulators say, imposed a duty on Panuwat not to trade in Incyte or any other competitor after learning about Medivation’s sale.

Efforts to reach Panuwat’s attorney, Anthony Pacheco of Vedder Price, have been unsuccessful.

This article first appeared in affiliate publication Regulatory Compliance Watch