California District Court Allows Novel SEC Insider Trading Theory To Proceed | Shearman & Sterling LLP

On January 14, 2022, Judge William Orrick of the US District Court for the Northern District of California issued an order denying a previous executive order for a biopharmaceutical company to deny and allow the Securities and Exchange Commission (“SEC”) to proceed with – a unique insider trading procedure. against a company insider for misappropriating confidential, undisclosed information relating to a prospective business merger to purchase securities issued by a third company that was not involved in the transaction.

In August 2021, the Securities and Exchange Commission (SEC) indicted a former executive of the California-based biopharmaceutical company, Medivation Inc. (“Medivation”), in violation of Section 10(b) of the Securities Act of 1934 (“Exchange Act”) and Rule 10B-No. 5 for allegedly relying on inside information obtained while working at Medivation to purchase shares of a different company, Incyte Corporation (“Incyte”), a practice that some academics have dubbed “shadow trading”. We see SEC charges trading fees based on new theory (August 26, 2021). The Securities and Exchange Commission alleged that Matthew Banoat, the former head of business development at Meditation, learned information regarding the expected acquisition of Meditation by Pfizer, and minutes after receiving this information, Banwat purchased the short-term non-financial shares. Options in Medivation’s competitor, Incyte, anticipating that Incyte will increase in value materially when the acquisition of Medivation becomes publicly available.

Banawat moved to dismiss the SEC’s complaint, which he described as an “unprecedented expansion” of the exchange law. Specifically, Panuwat argued that the Securities and Exchange Commission (SEC) failed to adequately pay that information Panuwat received relating to the impending acquisition of Pfizer-Medivation was material to Incyte. Panuwat argued that Rule 10b-5 requires the SEC to argue that Incyte traded on the basis of material non-public information about that security or the issuer, and that the SEC could not rely on Panuwat’s possession of non-public information related to the brokerage. In response, the Securities and Exchange Commission (SEC) argued that Panuwat was incorrectly trying to narrow the meaning of materiality and that information, including information Panuwat received relating to Medivation, could be material to more than one company. The court found the SEC’s reading of Section 10(b) to be more compelling and noted that Rule 10b-5 has a broad scope, prohibiting insider trading for “any security” using “any fraudulent or deceptive device.” We see § 15 USC § 78(j) (b); 17 CFR § 240.10b-5 Code of Federal Regulations. Furthermore, the Court noted that the information may be important to the issuer even if it comes from outside the company and that the language of Rule 10b-5 makes it clear that the text of the Rule does not provide an exhaustive list of manipulative schemes or devices that the Rule may prohibit.

In addition, Banawat argued that he did not breach his duty to Medivation, as required under the theory of misappropriation of insider trading, because Medivation’s insider trading policy did not prohibit trading in Incyte’s securities and the Securities and Exchange Commission failed to claim that Incyte were an important collaborator, customer, partner, supplier or competitor of Medivation, as will be covered by the policy. The court rejected this argument, finding that the above categories of companies included in Medivation’s insider trading policy were merely examples and not an exhaustive list and that Medivation’s insider trading policy was broad enough to limit the purchase of any publicly traded company based on uninformed information. General acquired by a Medivation employee on the job.

Panwat further argued that the SEC did not sufficiently claim that he acted knowingly, arguing that the SEC’s allegations that he “used” information about the Medivation acquisition to purchase Incyte stock options lacked the privacy required under Rule 9(b) of Federal law. Civil Procedure Rules. The court also disagreed on this point, finding that the entirety of the circumstances surrounding Panuwat’s purchase of Incyte shares allegedly indicated that Panuwat used material non-public information about the Medivation acquisition and thus acted knowingly. Finally, Banwat argued that the SEC’s new application of the misappropriation theory, which the SEC recognized as the first such measure, would improperly expand the law and infringe Banwat’s due process rights. The Court held that although there were no other insider trading cases where the material non-public information in question was used to purchase third party security, the SEC theory still fell within the general framework of insider trading and the general language of Section 10(b). ) and related regulations. The court also noted that while the SEC’s liability theory was new, the requirement that non-public information used be material to the third party and the science requirement act as “protective barriers” that would prevent the outer limits of insider trading liability from becoming not entirely clear.” “

As mentioned earlier, this case represents the first time that the Securities and Exchange Commission (SEC) has filed an insider trading case where confidential information related to a company’s acquisition was used to trade the securities of a company unrelated to the transaction. While this decision in lower court represents a major victory for the SEC, many hurdles remain for the SEC, including whether it can convince a jury that the Medivation information in question was in fact material to Incyte, and if That was the case, whether the Ninth Circuit would eventually agree to Judge Urek’s ruling. However, this view emphasizes the need for companies to consider carefully whether insider trading policies and training materials adequately reflect this insider trading theory.

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Order of Judge William Orrick of the United States District Court for the Northern District of California

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