3 French Hens? No. SEC Presses Enforcement on Insider Trading, Shadow Trading, Reg FD

The SEC did not take its foot off the pedal in fiscal year (FY) 2024 when it came to prosecuting insider trading. In the third installment of Season's Readings, we consider several recent actions in which the agency secured settlements or outright victories in enforcement actions involving insider trading and shadow trading – and even a rare settlement involving a violation of Regulation FD (Fair Disclosure; Reg FD).

Insider Trading Remains a Focus of Enforcement

In 2024, the SEC brought and/or settled 35 insider trading actions, which represented a slight 1 percent increase over last year's total of 32 actions. Though the percentage of cases in 2024 increased from the prior year, the numbers for both 2023 and 2024 were below historical standards, which tends to suggest that run-of-the-mill insider trading cases may have become less of a focus of recent enforcement efforts. A perennial feature of SEC enforcement and often paired with parallel criminal cases, insider trading actions accounted for just 6 percent of the SEC's total actions in 2024. That's not to say that the SEC is not monitoring these issues and pursuing them aggressively when they arise. Just a few of the interesting actions the SEC brought or settled charges for violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 (Exchange Act) in 2024 included:

• Eavesdropping Husband. On Feb. 22, 2024, the SEC charged the husband of a public company executive with insider trading after he allegedly traded ahead of the company's public announcement of an acquisition, making $1.76 million in the deal. The SEC alleged that the husband overheard his wife's business conversations regarding the acquisition while she worked remotely. The husband agreed to enter into a consent judgment in the SEC's enforcement action and disgorge his profit along with prejudgment interest and a civil penalty in an amount yet to be determined by the court. The husband also pleaded guilty to criminal insider trading charges and was sentenced to two years in prison followed by one year of supervised release.
• Friends with Benefits? The SEC on May 10, 2024, charged a man with insider trading and misappropriation of material nonpublic information (MNPI) related to a public company. The SEC alleged that between 2019 and 2021, this individual took advantage of his friendship with a company employee who had access to various sources of MNPI, including the company's financial results. The SEC alleged that the employee would respond to the individual's frequent questions regarding performance by indicating generalities such as the company was doing well along with requests that the information not be used for trading. The employee was not charged or identified by name in the SEC's complaint. Without admitting or denying the allegations, the trader agreed to a settlement that included a permanent injunction from violating the charged provisions of the federal securities laws, disgorgement, prejudgment interest and a civil money penalty in amounts determined by the court. He was also charged with criminal insider trading, pleaded guilty and was sentenced to 12 months and one day in prison, to be followed by three months of home detention and 12 months of supervised release, and ordered him to pay a $20,000 fine and disgorge his profits.
• Deadlines Matter. On Sept. 25, 2024, the SEC settled charges against 23 entities and individuals for failing to file timely reports concerning their holdings and transactions in public company stock – i.e., Schedules 13D and 13G reports and Forms 3, 4 and 5. The SEC also charged two public companies for contributing to filing failures by their officers and directors and failing to report their insiders' filing delinquencies as required. Without admitting or denying the allegations, all the individuals and entities settled with the SEC, paying fines that ranged from $10,000 to $750,000. Thomas P. Smith Jr., Associate Regional Director of Enforcement for the SEC's New York Regional Office, noted that investors rely on this information when making investment decisions and "[these] actions are a reminder to large investors that they must commit necessary resources to ensure these reports are filed on time."
• Hacked! The SEC filed charges in U.S. District Court for the District of New Jersey against an alleged British hacker on Sept. 27, 2024 (three days before the end of the SEC's FY 2024) for allegedly hacking into the computer systems of five public companies in the lead-up to the companies' earnings announcements by resetting the passwords of senior level executives. The SEC alleged that the hacker used the deceptively obtained MNPI to trade in the companies' securities, generating approximately $3.75 million in illicit profits. The SEC is seeking a final judgment enjoining him from future violations of the charged provisions of the federal securities laws and ordering him to pay civil penalties and disgorge his ill-gotten gains with prejudgment interest. The DOJ also filed a criminal complaint in the same court. The hacker has been arrested in London and faces extradition. Both cases remain pending.
• Boardroom Breach. The SEC charged a former public company board member and four friends for trading on MNPI in advance of a public announcement that a private equity firm offered to acquire the company and take it private. After the board member learned about the offer and subsequent status of negotiations, he allegedly fed information to his friends, who, like the board member, traded in the company's securities, generating a total $2.2 million in illicit profits. Without admitting or denying the allegations, the individuals all settled with the SEC. The board member agreed to disgorge his $801,742 in profits, pay a civil monetary penalty in the same amount plus prejudgment interest and to an officer-and-director bar. The four friends agreed to disgorge their profits and pay civil monetary penalties in amounts equal to their profits along with prejudgment interest.

Shadow Trading Has a Moment

In 2024, the SEC – with some success in courts – clarified (or expanded, perhaps, depending on one's perspective) what constitutes insider trading. Specifically, according to the SEC, unlawful conduct can also take the form of "shadow trading," or using MNPI learned from one company to engage in a securities transaction involving a different company whose share price is predictably influenced by the MNPI's disclosure. To date, the SEC has filed two enforcement actions under the shadow trading theory, as we have discussed at length here and here:

SEC v. Panuwat. On April 5, 2024, after an eight-day evidentiary trial followed by a brief deliberation period, a jury in the U.S. District Court for the Northern District of California found Matthew Panuwat liable for insider trading. Panuwat – an employee of the biopharmaceutical company Medivation – learned that Medivation was being acquired by an international pharmaceutical company (Pfizer). Evidence at trial showed that Panuwat purchased out-of-the-market, short-term stock options in a different biopharmaceutical company (Incyte) seven minutes after receiving an internal email about the impending acquisition and that Panuwat was subject to an insider trading policy and confidentiality agreement prohibiting use of insider information for one's own benefit. When the acquisition was announced to the public, Panuwat's trades in Incyte earned him $107,066 in profit. Of the many legal issues that will undoubtedly be the focus of future litigation in shadow trading matters, the Panuwat case highlights two:

1. Market Connection. The shadow trading theory – and the result of this case – necessarily expand what information is considered material for MNPI. At first blush, the fact that Medivation was being purchased by Pfizer would not obviously be material to Incyte – a company with no part in the transaction. But, the court found, because a "market connection" existed between Medivation and Incyte, Panuwat's knowledge of the impending sale was also material as to Incyte.
2. Breach of Some Duty. The shadow trading theory, as a subset of the misappropriation theory, requires that the trader breach some fiduciary, contractual or similar duty. For Panuwat, the SEC asserted three possible sources for this obligation: internal insider trading policies, confidentiality agreements and agency law. Helpfully for enforcement staff conducting future SEC investigations and those no doubt already underway, the court held that all three were viable paths to establishing a breach.

Though the trial lasted eight days, the jury found Panuwat civilly liable for insider trading after only a few hours of deliberations. In August 2024, the court denied Panuwat's post-trial motions for a directed verdict and new trial. On Nov. 8, 2024, Panuwat appealed the district court's final judgment and denial of his post-trial motions to the U.S. Court of Appeals for the Ninth Circuit, meaning we may soon have the appellate decision on this theory.

SEC v. Bechtolsheim. On March 26, 2024, the SEC filed its second shadow trading case – this time a fully settled action alleging that technology company Arista Networks' former chair and CEO, Andreas Bechtolsheim, profited from trading on insider knowledge that a different technology company was about to purchase Acacia Communications Inc.

The SEC's complaint alleged that Bechtolsheim learned about an impending acquisition of Acacia through Arista's relationship with a third-party tech company. That third-party company had previously considered acquiring Acacia. When the third-party company learned that a different company placed an offer to purchase Acacia, it reached out to Bechtolsheim to discuss the competing bid. After learning about the separate bid information, Bechtolsheim allegedly purchased put option contracts for Acacia through brokerage accounts of a relative and an associate just before the market closed on July 8, 2019. The acquisition was publicly announced the next day, and Acacia's stock price jumped 35.1 percent, resulting in $415,726 in total profit for Bechtolsheim. The SEC alleged that Bechtolsheim's trading on alleged MNPI – material information learned in the course of his employment and applied to trade in securities of a different company – violated Arista's internal insider trading policy and Exchange Act Section 10(b) and Rule 10b-5 thereunder. Concluding a nonpublic investigation of unknown duration, rather than litigate – and perhaps bearing witness to the challenges Panuwat's own case had faced – Bechtolsheim agreed to settle the action without admitting or denying the SEC's allegations. On May 30, 2024, the court approved and entered a settled final judgment against Bechtolsheim based on allegations of insider trading. The settlement is notable as the second instance of the SEC bringing an enforcement action for insider trading under the shadow trading theory. In settling, he consented to the entry of a judgment enjoining him from violating section 10(b) and Rule 10b-5, agreed to pay a civil penalty of $923,740 and agreed to suspension from serving as an officer or director of a public company for five years.

For Consideration. Although insider trading actions may have remained relatively low for the second straight year compared to historical norms, each of these 2024 SEC enforcement actions demonstrates that the SEC is still monitoring, investigating and prosecuting insider trading and other misuse of MNPI by market participants through the use of its data analytics tools and in close collaboration with the Financial Industry Regulatory Authority (FINRA) and U.S. Department of Justice (DOJ). The SEC has introduced shadow trading as a new form of insider trading and more such actions are likely to follow – though whether new agency leadership will continue advancing what some consider novel theories in this space is in question. As such, companies should remain ever vigilant in the enforcement of their insider trading and trade reporting policies and individuals should be cautious not to improperly disclose or trade securities based on MNPI.

Reg FD on the SEC's Radar Screen

On Sept. 26, 2024, the SEC charged an issuer with violating Section 13 of the Exchange Act and Reg FD for selectively disclosing MNPI on the CEO's social media accounts without disclosing the same information to all investors. On July 27, 2023, the issuer's public relations firm posted on the CEO's personal X account and LinkedIn account that the company continued to see strong growth. The issuer had not yet publicly disclosed its second quarter financial results or other information included in the two posts. The communications team recognized the public relations firm's error and had the posts removed within 30 minutes. Despite the fact that the issuer partially remedied the situation with the removal, the SEC pursued charges on the basis that the company failed to promptly disclose the same information to the general public.

In the case of non-intentional selective disclosure, Reg FD requires that the public disclosure be made "promptly," which is defined to mean "as soon as reasonably practicable (but in no event after the later of 24 hours or the commencement of the next day's trading on the New York Stock Exchange) after a senior official of the issuer … learns that there has been a non-intentional disclosure by the issuer or person acting on behalf of the issuer of information that the senior official knows, or is reckless in not knowing, is both material and nonpublic." 17 C.F.R. §§ 243.100(a)(2) and 243.101(d). Here, the company did not disclose the information until seven days later when it made its earnings announcement. Without admitting or denying the allegations, the issuer agreed to settle the action and cease and desist from future violations of the charged provisions, pay a $200,000 civil penalty and comply with certain undertakings, including Reg FD training for employees with corporate communications responsibilities.

For Consideration. Reg FD enforcement actions are rare; however, the SEC will not hesitate to pursue them when they arise and are not, in the staff's view, adequately addressed by the issuer. From this particular matter, companies should recognize that 1) to the extent they wish to push out information via social media channels – including company accounts or executive accounts – those disclosures will not be deemed "public disclosure" unless the company has informed investors that the company will disseminate information through those channels, 2) the safer practice is to make the public disclosure through more traditional channels – e.g., public filings, press releases with Form 8-Ks – prior to social media posts and 3) in the event of a non-intentional disclosure to some investors, the company must promptly disclose the key information to all investors within the time period required by Reg FD.