SEC CORNER

SEC’S SHADOW TRADING CASE MOVES FORWARD

SEC v. Panuwat, No. 4:21-cv-06322-WHO (N.D. Cal., Jan. 14, 2022)

In furtherance of his role in business development for a mid-cap biopharmaceutical company, an employee received non-public information concerning the company’s merger discussions. 

Within minutes of receiving the information, the employee purchased option contracts of another biopharmaceutical company, resulting in a significant gain. Thereafter, the U.S. Securities and Exchange Commission (“SEC”) sued the employee, alleging he violated Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 by “misappropriating confidential information for securities trading purposes, in breach of a duty owed to the source of the information.” 


The employee argued that information is only material in the merger context to the two entities negotiating the deal, not to all companies in the field. The court, however, disagreed with that notion, finding Section 10(b) prohibits insider trading of “any security” and does not state that the information about the security must come from the security issuer itself in order to be considered material. The court further found that the SEC sufficiently alleged the employee breached his duty to his company by using the information he learned about the merger to purchase the stock options, despite the employee’s assertion that the company’s insider trading policy did not contemplate trading in the securities of competitors. Lastly, noting that the employee acted “within minutes” of learning the information and had never traded the competitor’s stock before, the court found there was sufficient evidence to suggest the employee used the information at issue when trading the stock and therefore acted with the requisite intent. Accordingly, the court found the SEC’s novel “shadow trading” theory was sufficient to allow the case to move forward.

 

The Takeaway

Although this case’s applicability is limited to the specific facts at hand, portions of the court's ruling reveal an endorsement of the SEC's first of its kind shadow trading theory, which could have significant implications. Without an interlocutory appeal, the court's decision could become the standard for shadow trading cases for the foreseeable future. Companies should consider whether to revise insider trading policies in light of this ruling.

 

SEC PROPOSES NEW DISCLOSURE MANDATES FOR PRIVATE MARKET PARTICIPANTS

In an effort to expand federal oversight of private markets, the U.S. Securities and Exchange Commission (“SEC”) recently voted on a proposal to increase the amount of confidential information that private equity and hedge funds are required to report to the agency. 

In a series of remarks made weeks before the proposal, SEC Chairman Gary Gensler laid out his priorities for the Division of Enforcement in the private fund space. With the amount of net assets being managed by private funds increasing exponentially, the SEC and other federal regulators are concerned about transparency and the potential for unseen risks to investors. 


The proposal will require large hedge and private equity funds to file reports after certain events, such as large investment losses or the termination of investments, as well as provide information about their use of leverage. In the coming months, the SEC also plans to increase scrutiny of other nonpublic companies, with the goal of increasing the amount of information some must file with the agency.

 

SEC STARTS 2022 WITH SIGNIFICANT WHISTLEBLOWER AWARDS

The U.S. Securities and Exchange Commission (“SEC”) recently awarded over $40 million to four whistleblowers in three separate actions. 

The first and largest award went to two joint whistleblowers who received approximately $37 million for providing key evidence that contributed to the success of the covered action. The second order involved a single whistleblower who was awarded $1.8 million for providing new information that caused the SEC to open an investigation into the misconduct. The third award, which was approximately $1.5 million, went to a whistleblower who provided new information that shaped the SEC’s investigative strategy and significantly contributed to the success of the covered action. In all three orders, the SEC noted the whistleblowers provided ongoing assistance that helped the SEC identify additional information that advanced its investigations.


Since issuing its first whistleblower award in 2012, the SEC has awarded approximately $1.2 billion to 245 individuals who voluntarily provided the SEC with original, timely, and credible information that led to a successful enforcement action.

 

SEC ENFORCEMENT ACTIONS, SETTLEMENTS AND JUDGMENTS

January 2022 Noteworthy Enforcement Actions Filed

 Director/Officer

 Role

 Company

 George K. Witherspoon 

 President 

 Bóveda Asset Management, Inc.

 Paul A. Garcia

 CFO

 Gold Hawgs Development Corp.

January 2022 Noteworthy Settlements and Judgments 

Amount

Director/Officer

Role

Company

$6,086,547.00 

Gary Pryor

CEO

ZipRemit, Inc.; Lendaily, Inc.

$800,712.00

Nicole BirchFormer CEOTransatlantic Real Estate, LLC

$270,000.00

Ajay TandonCEOSeeThruEquity, LLC

$250,000.00

Amit TandonDirector of Research SeeThruEquity, LLC

$9,700.00

Vincent PetrescuCEOTruCrowd, Inc.

 

Source: U.S. Securities and Exchange Commission