San Francisco, CA – The recent insider trading case against Matthew Panuwat has sparked a debate over the definition and prosecution of insider trading in the United States. The U.S. Securities and Exchange Commission (SEC) celebrated a jury verdict in favor of the prosecution, asserting that it was a clear case of insider trading. However, critics argue that the SEC’s theory of shadow trading is novel and not explicitly outlined in the federal statutes that govern insider trading.
According to the SEC, Panuwat used confidential information about an impending acquisition of biopharmaceutical company Medivation, Inc., the firm he worked for, by Pfizer Inc. He then used that information to trade call options of another publicly traded company, Incyte Corporation, resulting in substantial financial gain. The SEC’s Director of Enforcement emphasized that this was a textbook case of insider trading, where Panuwat exploited privileged information for personal enrichment.
However, dissenting voices point out that insider trading is not explicitly mentioned in Rule 10b-5, the regulation frequently used in such cases. Instead, the statute refers to trading “on the basis of” undisclosed material nonpublic information. This has resulted in a lack of clarity and a subjective approach to cases involving insider trading.
The complexity of the legal terrain surrounding insider trading has led to concerns about due process. Defendants often find themselves in a precarious position, as they may not know where the boundaries lie until courts establish them during their trials. This has resulted in convictions even as courts shape the theories for prosecution. The fact that the U.S. Supreme Court is still grappling with the definition of insider trading decades after its inception raises questions about the viability of current criminal convictions.
Critics argue that if insider trading is deemed a criminal offense, Congress should take the lead in explicitly defining the elements of the crime. In California, the legislature has already taken steps in this direction, with Corporations Code Section 25402 providing a comprehensive framework for regulating insider trading.
The willingness of federal courts to imprison individuals for a crime that lacks clear federal statutory definition undermines the principle that lawmakers should determine what constitutes a criminal act. While Panuwat’s case was civil, legal experts anticipate that this novel theory will soon be applied in a criminal prosecution, intensifying the ongoing debate over the definition and boundaries of insider trading.
As the SEC treads new ground in prosecuting insider trading cases, the question remains: will Congress step in to provide a much-needed clarification, or will the courts continue to shape the landscape through their judgments and convictions? This dispute highlights the complexities surrounding insider trading regulations and the need for a more defined and unified approach to ensure fair and consistent enforcement.