by John F. Savarese, Wayne M. Carlin, and David B. Anders
From left to right: John F. Savarese, Wayne M. Carlin, and David B. Anders (photos courtesy of Wachtell, Lipton, Rosen & Katz).
Last week, a jury in San Francisco returned a verdict in SEC v. Panuwat, finding that a corporate executive engaged in insider trading when he learned about an impending acquisition of his employer and then traded in the securities of an unrelated company in the same industry. The case has widely been described as “novel” but, in bringing this case, the SEC did not seek to extend existing law. Panuwat simply applied well-established principles of insider trading law to a new fact pattern. Yet in doing so, this action may well have implications for corporate trading policies.
Mathew Panuwat was an executive at Medivation, Inc., an oncology-focused biopharmaceutical company. The SEC presented evidence at trial that, in the course of his employment, Panuwat learned that Medivation expected to be acquired at a premium to its market price. Panuwat did not trade in Medivation securities. Rather, he purchased out-of-the-money call options in Incyte Corporation, another oncology-focused biopharmaceutical company. The SEC claimed that Panuwat believed Incyte’s stock price would rise when the Medivation acquisition was announced, and he obtained $120,000 in profits from the trade.
To prevail, the SEC needed to prove, consistent with established insider trading law, that Panuwat breached a duty when he purchased Incyte options. To establish a breach of duty, the SEC focused on Medivation’s insider trading policy. The policy prohibited employees from profiting from Medivation’s material nonpublic information by trading in Medivation securities or in the securities of “another publicly traded company.”
Many corporate insider trading policies include similar broadly worded provisions. Typically, companies include such language with an eye to information that personnel may obtain concerning vendors, customers, joint venturers or potential acquisition targets. The SEC’s Panuwat victory demonstrates that this policy language can have more sweeping implications, including the possibility of insider trading liability for transactions in securities of companies with which the employer has no direct dealings. In view of this result, it would be prudent for companies to review their policies to ensure that they accurately describe the scope of activities intended to be prohibited. And, if a company intends to impose broad duties on its directors, officers and employees, as the Medivation policies were deemed to have done, it should ensure personnel are aware of those obligations through training and other compliance measures.
John F. Savarese, Wayne M. Carlin, and David B. Anders are Partners at Wachtell, Lipton, Rosen & Katz. The article was first distributed by the firm as a memo.
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