“Novel” or Not: the SEC and DOJ’s Expansion of Insider Trading to “Shadow Trading” and 10b5-1 Plans Survive Their Days in Court

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On April 5, 2024, the U.S. Securities and Exchange Commission ("SEC") won a jury verdict in its first "shadow trading" insider trading action. Only a few weeks before this verdict, a court denied a motion to dismiss a criminal indictment for an insider trading charge based exclusively on the filing of a 10b5-1 plan. As courts are now showing a willingness to accept the SEC and DOJ's expansion of insider trading activity to "shadow trading" and 10b5-1 plans, it may be time for public companies and other entities to reconsider their insider trading policies.

Shadow Trading Action. The case against Matthew Panuwat represented the SEC's first charge of "shadow trading": the practice of a corporate insider trading shares of an "economically linked" company while in possession of material nonpublic information ("MNPI") about the insider's own company. As discussed in our prior client alerts, the SEC filed insider trading charges against Panuwat, at the time an employee of Medivation Inc., a mid-sized oncology-focused biopharmaceutical company, for trading ahead of the announcement that Medivation would be acquired by Pfizer Inc.1 The trades were not in Medivation shares. Rather, Panuwat traded in the securities of a third-party company, Incyte Corporation, which was a comparable mid-cap oncology-focused biopharmaceutical company that had traded similarly to Medivation after a previous announcement of a merger in their sector.

During the trial, Panuwat's attorneys argued that the SEC couldn't prove that Panuwat had an intent to defraud because he didn't know it was illegal to trade in a company that wasn't his employer and that didn't conduct business with Medivation. The jury disagreed. When announcing the verdict, the SEC's Director of Enforcement emphasized that: "As we've said all along, there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple. Defendant used highly confidential information about an impending announcement of the acquisition of biopharmaceutical company Medivation, Inc., the company where he worked, by Pfizer Inc. to trade ahead of the news for his own enrichment."2

10b5-1 Action. Similarly, the DOJ3 and SEC4 actions against Terren S. Peizer show the government following through on its warnings that it would now be targeting insider trading in connection with a 10b5-1 plan.5 Peizer, CEO and Chairman of the Board of Directors of the publicly traded healthcare company Ontrak Inc., is accused of avoiding more than $12.5 million in losses by entering into two 10b5-1 plans to sell Ontrak securities. The DOJ and SEC allege in parallel actions that Peizer entered into the plans while in possession of nonpublic information that Ontrak's relationship with its then-largest customer was deteriorating and at risk.

Rule 10b5-1 plans typically provide an affirmative defense for corporate insiders buying and selling company stock so long as their trading plans are adopted in good faith and before the insider becomes aware of MNPI. The charges against Peizer were brought in the same week as the effectiveness of the SEC's recent amendments to Rule 10b5-1 to address what the SEC viewed as the potential for corporate insiders to unfairly trade on the basis of MNPI using 10b5-1 plans.6 Peizer attested that he was unaware of MNPI related to Ontrak when he entered into his 10b5-1 plans and subsequently sold the company's shares. Six days after Peizer adopted his second 10b5-1 plan, Ontrak announced the customer terminated the contract and the company's stock price fell by more than 44 percent.

In his motion to dismiss the indictment, Peizer said that the information he possessed was public because the company disclosed the potential loss of the customer's business in a statement made to investors days before he entered into his first trading plan.7 That disclosure said customers "may decrease their enrollment levels." The court, however, found that the indictment contained multiple allegations that Peizer possessed information that Ontrak shareholders did not have.8

Key Takeaways

The jury verdict in the Panuwat case combined with the denial of dismissal of the Peizer indictment, puts public companies and traders on notice that the SEC and DOJ can successfully pursue novel theories of insider trading. As a result, public companies and trading entities, such as hedge funds or other investment advisers, should consider the following with input from counsel:

1. Restrict "Shadow Trading." As we had advised, insider trading policies should explicitly restrict trading by insiders in third party companies that could be considered "economically linked." This could include an assessment of whether MNPI held by insiders of a company could affect the share price of companies in the same sector or subsector. Suggested language in a policy could include: "No Insider may buy or sell securities of another company at any time when the Insider has Material Non-Public Information about that company or has Material Non-Public information that could affect the share price of that company" (emphasis added).

2. Expand Special Blackouts. Insider trading policies should emphasize the importance of special blackouts that prohibit trading by insiders in possession of MNPI during the pendency of an acquisition or other extraordinary transaction and should consider expanding the blackouts to trading in "economically linked" companies.

Public companies and their insiders should also consider the following, in light of the DOJ's and SEC's heightened focus on 10b5-1 violations:

3. Importance of reviewing 10b5-1 plans and processes. Prior to entering into 10b5-1 plans, the plans should be reviewed by legal counsel to confirm compliance with all of the conditions of Rule 10b5-1, as amended in 2022, including the required cooling off period prior to the start of trading.9

4. Demonstrate good faith when establishing 10b5-1 trading plans. Directors and executive officers entering into 10b5-1 plans must attest that, at the time of the creation of the plan, they are not aware of MNPI about the issuer or its securities and that they are adopting the plan in good faith and not as part of a scheme to evade prohibitions of Rule 10b5.10 This may require analysis and counsel's assessment of whether an individual has MNPI at the time that they execute their 10b5-1 plan. In addition, all those adopting a 10b5-1 plan must act in good faith with respect to the plan for the duration of the plan.

Stephanie Gusching (White & Case, Law Clerk, New York) co-authored this publication.

1 For more information, see our prior alerts, "Time to Revisit Insider Trading Policies: The SEC's Expansion of Insider Trading Enforcement to "Shadow Trading" Survives Motion to Dismiss" and "SEC Extends the Misappropriation Theory of Insider Trading Beyond Targets of Acquisitions to Companies 'Economically Linked' to Such Targets."
2Statement, U.S. Sec. & Exch. Comm'n, Statement on Jury's Verdict in Trial of Matthew Panuwat (Apr. 5, 2024),
3 Press Release, U.S. Dep't of Just., CEO of Publicly Traded Health Care Company Charged for Insider Trading Scheme (Mar. 1, 2023),
4 Press Release, U.S. Sec. & Exch. Comm'n., SEC Charges Ontrack Chairman Terren Peizer With Insider Trading (Mar. 1, 2023),
5 See our prior alert discussing this scrutiny: "SEC Statements Suggest Heightened Insider Trading Scrutiny Even if Using a Rule 10b5-1 Trading Plan."
6 The 10b5-1 reforms include, among others, mandatory cooling off periods, restrictions on multiple overlapping plans, and director and officer certifications. See our description of the amendments in our client alert: "SEC Adopts Amendments to Rule 10b5-1."
7 Defendant's Notice of Motion to Dismiss, U.S. v. Peizer, Docket No. 3:23-cr-00089 (C.D. Cal. Jan 8, 2024), ECF No. 101.
8 Order Denying Motion to Dismiss First Superseding Indictment, U.S. v. Peizer, Docket No. 3:23-cr-00089 (C.D. Cal. Mar. 7, 2024), ECF No. 126.
9 See a summary of the five conditions in our client alert:
10 Press Release, U.S. Sec. & Exch. Comm'n., SEC Adopts Amendments to Modernize Rule 10b5-1 Insider Trading Plans and Related Disclosures (Dec. 14, 2022),

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