Finance

Finance Docket: Is Everything Insider Trading?

The SEC's 'shadow insider trading case' is just one potential broadening of insider-trading liability.

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What is insider trading? A decade ago, some on the legal right and some caught doing it offered a provocative answer: Nothing. It didn’t exist. After all, there wasn’t a law against it — not an explicit one, anyway. (And there still isn’t.)

At the very least, they argued, much of what had long passed for insider trading wasn’t, in fact, insider trading. And for a moment, it seemed that they might be vindicated on at least that point, when the Second Circuit Court of Appeals nine years ago dramatically narrowed the definition of insider trading, ruling that a person needed to know that the person passing them the inside dirt got something tangible for it in order to be guilty of insider trading.

Two years later, an Antonin Scalia-less Supreme Court said that their lesser had seriously misunderstood things, and unanimously, at that. Nothing tangible needed change hands; brotherly love alone, for instance, would suffice. And it has repeatedly, albeit reluctantly, stood by that ruling ever since.

There have since been some setbacks for the Justice Department and Securities and Exchange Commission — such as an insistence on at least some evidence of the crime — but for the most part they’ve been on the offensive ever since. Having nearly lost the concept entirely, they’ve spent the seven years dedicated to showing just how many things are, in fact, insider trading. Sure, perhaps elected representatives are allowed to do it, but executives with 10b5-1 plans can’t. Such standard Wall Street practices as block trading, special-purpose acquisition companies, shareholder activism, and short selling were all rife with insider trading, according to the authorities, if they didn’t ipso facto constitute insider trading in and of themselves.

Last year, the SEC went a step even further. It sued a biotechnology executive for insider trading — of another company’s shares, without any material non-public information about that company, per se. Instead, the material non-public information Matthew Panuwat allegedly had was that his own company was about to be acquired.

Research has shown that peer stocks are historically correlated: Even though Incyte wasn’t being bought by Pfizer, like Panuwat’s employer Medivation, its stock was likely going to rise alongside Medivation’s once the news broke — and so it did, jumping 8% when the Medivation-Pfizer deal was announced. This earned Panuwat a tidy $120,000, because just seven minutes after he got an e-mail from Medivation’s CEO internally disclosing the deal, he allegedly bought up a whole bunch of Incyte options — on his work computer, no less.

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Both sides have plenty of arguments as to why this is or isn’t insider trading, as traditionally understood.

The SEC notes the suspicious timing, the fact that Panuwat wasn’t prone to playing in options and that Medivation policy forbade trading in rival stocks when in possession of insider info about Medivation, and Panuwat’s sale of some (but not all) of the options just days later.

Panuwat argues that rumors about Pfizer’s interest in Medivation were rife, that he’s been suspected of insider trading before but cleared (an odd point to make in one’s defense but OK), that he didn’t see the CEO’s e-mail, that he was busy and his mind was on other things.

But in November a judge brushed aside those objections — and the novelty of the “shadow insider trading” argument — and Panuwat goes on trial this month.

If he loses, well, expect to hear a lot more about “shadow insider trading,” and if you happen to be the sort of person in possession of material non-public information about your employer, maybe just stop trading stocks entirely, because who’s to say such shadowy business stops at peer stocks? If something your company says or does moves the market more generally, is it safe even to trade index funds?

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“If the SEC loses, it’s only because there is a hesitation about extending the jurisdiction of insider trading to peer companies,” the Wharton School’s Daniel Taylor told The Wall Street Journal. “I don’t think they lose on the facts.”

This potential broadening of insider-trading liability comes amidst word of another.

From the start of the pandemic, it’s been clear that working from home has led to an increase in insider trading. In the comfort of their own homes, “people acted with more impunity,” according to Morrison & Foerster’s Edward Imperatore.

And it’s not just the insiders themselves: A man, working just 20 feet from his wife in their Houston home — and even more closely in their tiny Roman Airbnb — couldn’t help overhearing her talk about a big deal being cooked up by her employer, BP. And after first successfully resisting the urge, he finally succumbed, pouring all $1.8 million of his savings into shares of the company BP was to acquire, turning a nearly 100% profit when it did.

When BP’s lawyers started asking those who’d worked on the deal — like Tyler Loudon’s wife — for personal information, however, Loudon was spooked. He eventually confessed to his wife, who kicked him out and told BP, and then put the confession in writing by way of a groveling apology for her subsequent firing, which confession wound up in the hands of the authorities (she didn’t take him back), and which will wind up putting him in prison.

In any case, that’s about the only convincing piece of evidence we’ve seen for the growing corporate desire to get people back into the office.

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