On April 5, 2024, in the case of the SEC v. Panuwat (Panuwat),[1] the U.S. Securities and Exchange Commission (the SEC) convinced a jury for the very first time of its “shadow trading” doctrine, according to which insider trading regulation is applicable where an individual in possession of material non-public information (MNPI) concerning the activities of one company trades in the securities of another company with which the first company shares some sort of close connection in the market.

While the enforcement regimes in Canada and the U.S. – particularly with respect to insider trading – may differ, the shadow trading doctrine may certainly interest our provincial and territorial securities watchdogs, and therefore, Canadian issuers would be well-advised to anticipate the risks that this expanded scope of regulatory scrutiny could pose for their business.

I. Factual background

Mr. Matthew Panuwat, a then-senior director at Medivation Inc. (Medivation), a mid-sized oncology-focused biopharmaceutical company, received a confidential email from Medivation’s CEO indicating that an acquisition of the company by a large pharmaceutical corporation was imminent.  Within minutes of receiving that email, rather than buying Medivation’s securities, Mr. Panuwat purchased out-of-the-money call options of another similar company, Incyte Corporation (Incyte), which is, like Medivation, a mid-sized oncology-focused biopharmaceutical company. According to the SEC’s complaint, Mr. Panuwat knew that outside analysts had named Incyte as a comparable company, and therefore anticipated that the acquisition of Medivation would likely lead to an increase in Incyte’s share price.  With Medivation’s announcement of the acquisition, Incyte’s share price jumped by around 8%, allowing Mr. Panuwat to make a profit of around US$107,000.

On August 17, 2021, the SEC charged Mr. Panuwat with insider trading in violation of Rule 10b-5 of the Securities Exchange Act of 1934.[2]  For the regulator, this meant extending the misappropriation theory applicable to insider trading – whereby the use of MNPI is considered fraud if it results in a breach of the insider’s obligations to the source of the information[3] – to situations in which there is no commercial link between the two companies and where the alleged transaction concerns the shares of a company that is not a party to the potential transaction involving a public issuer and MNPI.

Notably, Mr. Panuwat had also signed Medivation’s insider trading policy, which prohibited him from using MNPI to trade in the securities of “another publicly traded company, including significant collaborators, customers, partners, suppliers or competitors”.

II. The jury trial and verdict

Before moving to the jury trial, a federal judge of the U.S. District Court for the Northern District of California (the Court) denied Mr. Panuwat’s motions to dismiss and for summary judgment.[4]  The SEC summarily convinced the Court of genuine disputes of material fact concerning, notably, the materiality of the information to Incyte’s stock. Among other things, the Court noted the following:

  • There is nothing in statute or case law indicating that MNPI must only concern the parties to the subject transaction. The SEC’s allegations were sufficient to support the materiality test as: (1) Medivation and Incyte were among a small number of comparable companies in a relatively small industry; (2) it would have been reasonable to assume that the companies that expressed interest in acquiring Medivation would turn to Incyte as their next acquisition target; and (3) Incyte’s stock price rose on the day the Medivation acquisition was announced.  Although the two companies need not be direct competitors, they must be (and were) more than “allegedly similar”.
  • The language of a company’s insider trading policy can determine the scope of potential liability for those subject to it.  In this case, the policy was broad enough to cover trading in the securities of any other listed company.  Its use of a non-exhaustive list of the type of companies covered by the prohibition did not limit its generality.  Mr. Panuwat therefore had a duty to Medivation not to use the MNPI obtained through the course of his employment.
  • The trader’s trading history and the timing of the trade are critical factors going to intent.  Mr. Panuwat’s intention to use the MNPI could be inferred from the fact that he traded in Incyte securities, for the first time ever, only minutes after receiving an email indicating that the Medivation acquisition was imminent.

On April 5, 2024, after an eight-day jury trial, Mr. Panuwat was found liable of insider trading in violation of federal securities laws.  The SEC sought various penalties against Mr. Panuwat, including an order requiring Mr. Panuwat to pay a civil monetary penalty pursuant to Section 21A of the SEA[5] and prohibiting Mr. Panuwat from serving as an officer or director of a public company.[6]  The parties are to file remedies motions with the Court in the coming weeks, and the final sanction will be imposed following argument on the motions on August 7, 2024.[7]

III. Possible impact in Canada and takeaways

We know that Canadian securities regulators pay attention to legal developments south of the border, and the Panuwat case which has expanded the scope of insider trading regulation in the U.S. – may stand to influence how they think about insider trading.  

This may be particularly true in Québec, since the Securities Act[8] may already be broad enough to encompass the notion of shadow trading.  Section 189.1 of the Québec Securities Act indeed prohibits (i) the “use” of the MNPI[9] “in any other manner” as well as (ii) trading “in the securities of another issuer, in options or in other derivatives […] once their market prices are likely to be influenced by the price fluctuations of the issuer’s securities”.[10]  Based on its very wording, Section 189.1 includes two concepts that could be invoked by the Québec regulator, the Autorité des marchés financiers, in support of the shadow trading theory. One may still argue that the regulator could only invoke the second concept specifically referring to trading in the securities of a third party issuer, in the context of which it would need to show the “influence” between the market prices of the third party issuer and the price fluctuations of the issuer’s securities.[11] It appears unclear whether the term “influenced” could be satisfied by the existence of some sort of close connection between two companies, as in the case Panuwat.

By contrast, Ontario’s securities regulatory framework, for instance, appears to be less conducive on its face.  The wording of the relevant section in Ontario’s Securities Act[12] is framed more narrowly.  Section 76(1) provides that “[n]o person or company in a special relationship with an issuer shall purchase or sell securities of the issuer with the knowledge of a material fact or material change with respect to the issuer that has not been generally disclosed”.

For companies subject to Québec’s Securities Act, and their employees, Panuwat is a warning against taking too narrow of a view of insider trading.  Now may be the time for Québec businesses to review their insider trading policies to ensure that they are prepared for the impact that cases such as Panuwat could have on regulators’ approach to enforcing restrictions on insider trading in Canada.


[1] SEC v Panuwat, 21-cv-06322 (ND Cal Aug. 17, 2021) [SEC Complaint].

[2] Securities Exchange Act of 1934, 15 USC § 78j [SEA].

[3] See United States v O’Hagan, 521 US 642 (1997).

[4] See SEC v Panuwat, 2022 US Lexis 39584 (ND Cal) [Order on Motion to Dismiss]; SEC v Panuwat, 2023 US Lexis 234133 (ND Cal) [Order on Motion for Summary Judgment].

[5] SEA, supra note 2.

[6] See SEC Complaint, supra note 1.

[7] See SEC v Panuwat, 21-cv-06322 (ND Cal Apr. 29, 2024) [Order on Post-Trial Motions].

[8] RLRQ c V-1.1 [QSA].

[9] In Québec, this concept is referred to as “privileged information”.

[10] QSA, supra note 8. Our emphasis.

[11] Interpreting the scope of Section 189.1 of the Québec Securities Act, the Québec’s Financial Markets Administrative Tribunal held that a person prohibited from trading in the securities of an issuer under section 189.1 “cannot otherwise use privileged information of this reporting issuer, in particular by trading in the securities of another issuer, which could be a non-reporting issuer” (our English translation): Autorité des marchés financiers v Baazov, 2017 QCTMF 103 (appeal on grounds other than the meaning of s. 189.1), paras 116 and 118.

[12] RSO 1990, c S.5 [OSA]. Our emphasis.