Insider Trading and SEC Investigations

Dmitriy Smirnov

December 11, 2024

Firm News

The Securities and Exchange Commission (SEC) has ramped up enforcement in recent years, a trend that has continued unabated in 2024. The SEC recently released its enforcement results for fiscal year 2024, revealing both setbacks and milestones. While the agency initiated only 583 actions—a 26% drop from FY 2023—it achieved a historic $8.2 billion in financial remedies, the highest ever reported. Insider trading enforcement also increased as the SEC aggressively pursued novel liability theories to extend its jurisdiction.

Individuals facing SEC investigations should act swiftly to secure experienced SEC counsel to protect their rights and navigate these heightened enforcement efforts.  These are some of the notable insider trading cases pursued by the SEC this year.

Matthew Panuwat

On September 9, 2024, a federal district court in California upheld the jury’s verdict in SEC v. Matthew Panuwat, signaling potential shifts in insider trading law. Panuwat, a Medivation employee, was found liable for “shadow trading”—using nonpublic information about Pfizer’s acquisition of Medivation to trade call options for another company–Incyte, a third-party biopharmaceutical company and competitor of Medivation. Panuwat’s trades in Incyte earned him over $100,000 when the company’s stock increased after the acquisition was announced. The SEC argued Panuwat leveraged his industry expertise to predict a “spillover” effect on Incyte’s stock. Despite the unique facts limiting broader applicability, the case highlights the SEC’s focus on expanding insider trading enforcement.

On September 9, the court denied Panuwat’s motions for judgment or a new trial, maintaining the jury’s finding. It imposed the maximum civil penalty of $321,197.40 and enjoined him from future securities law violations. Interestingly, the court declined the SEC’s request to bar Panuwat from serving as an officer or director, deeming his actions serious but not egregious. Public companies may now need to reassess insider trading policies in light of this precedent. 

Bechtolsheim

In March 2024, the SEC filed a case against Bechtolsheim, the former chair of Arista Networks. The SEC alleged that Bechtolsheim illegally traded in Acacia options after learning of Acacia’s impending acquisition. The SEC alleged that Bechtolsheim’s trading violated Arista’s insider trading policy and the Securities Exchange Act of 1934.

Robert Brian Thompson

In November 2024, the SEC sued a former Fed Examiner for trading in stocks and options of two banks he supervised. The SEC alleged that Thompson used nonpublic information he obtained through his work to trade in the banks’ securities. 

The SEC’s case was a parallel action in that it filed its case shortly before Thompson pleaded guilty to insider trading and making false statements in connection with the same conduct. He admitted to using confidential supervisory information from his position to execute 69 trades in seven publicly traded financial institutions, resulting in approximately $771,678 in personal profits. Thompson also falsely certified to his employer that he had no such holdings. He is scheduled for sentencing on March 19, 2025, facing up to 20 years in prison for insider trading and five years for making false statements.

Understanding Insider Trading

Insider trading—buying or selling securities based on material, nonpublic information—obviously remains a significant focus for the SEC. Insider trading can undermine market integrity and erode investor trust. As a result, the SEC pursues violators aggressively to maintain fairness in the financial markets.

How Insider Trading Occurs

Insider trading occurs when individuals with privileged access to nonpublic information use that knowledge to make unfair gains in securities transactions. Common examples include corporate executives trading stock before earnings announcements, employees sharing sensitive financial data with friends or family, and third-party professionals, like lawyers or consultants, leveraging confidential client information. Such activities not only violate securities laws but also harm the level playing field that underpins market fairness. The SEC’s enforcement of insider trading laws serves as a critical deterrent against these activities.

The SEC’s Role in Enforcement

The SEC’s Division of Enforcement is tasked with uncovering and prosecuting insider trading. Learn more about the SEC’s enforcement actions here. The agency employs advanced market surveillance technology to track unusual trading patterns that may indicate insider trading. Whistleblower tips are another essential tool, with the SEC’s Whistleblower Program offering financial incentives for individuals who report violations. Additionally, the SEC issues subpoenas and conducts depositions to gather crucial evidence and testimony during investigations. These measures collectively allow the SEC to identify and build cases against violators effectively.

Lessons from Recent Cases

The SEC’s pursuit of insider trading has led to significant legal precedents. Two cases highlighted by Fridman Fels & Soto showcase the SEC’s approach. In the case of SEC v. Jarkesy, a landmark Supreme Court decision addressed the SEC’s in-house adjudication processes. The case emphasized the importance of due process in enforcement actions and has reshaped how administrative proceedings are conducted, ensuring that defendants receive fair treatment under the law. Additionally, recent insider trading cases demonstrate the SEC’s ability to collaborate with other agencies, such as the Department of Justice, to prosecute complex schemes. Explore key lessons and precedents from recent cases here. These cases also highlighted the risks companies face when compliance protocols fail, emphasizing the need for organizations to invest in preventive measures.

Best Practices for Individuals and Corporations

For individuals, avoiding insider trading begins with refraining from acting on material, nonpublic information, regardless of its perceived significance. Familiarity with company policies on insider trading is equally essential to avoid accidental violations. 

For corporations, implementing robust compliance programs to monitor employee trading activities is essential. Regular training sessions on securities laws reinforce the importance of ethical practices, while encouraging whistleblowers to report potential violations internally can prevent issues from escalating to SEC involvement.

To further mitigate risks, companies should consider instituting protocols such as “blackout periods,” during which employees are prohibited from trading company securities or those of related entities. Blackout periods, typically aligned with earnings releases, merger discussions, or other sensitive events, can significantly reduce the likelihood of insider trading. These measures, combined with monitoring and training, help protect companies from liability stemming from employee misconduct.

How Fridman Fels & Soto Can Assist

Defending against SEC investigations requires experienced counsel with a deep understanding of securities law. At Fridman Fels & Soto, we specialize in representing individuals and corporations in SEC inquiries. Our team excels in crafting defense strategies tailored to complex insider trading cases and navigating both administrative proceedings and federal court litigation. By leveraging trial expertise and insights from landmark cases, we aim to deliver exceptional outcomes for our clients.

Protecting your reputation and business starts with the right legal guidance. Contact Fridman Fels & Soto today to discuss your options if you receive a Wells Notice or a subpoena or voluntary request for documents or testimony from the SEC.