With last year’s change in administration, the appointment of Securities and Exchange Commission (SEC or the “Agency” or “Commission”) Chairman Paul Atkins, and Judge Ryan being named as enforcement director, there is much speculation regarding the SEC’s areas of focus for its enforcement program going forward. The preliminary expectation is that the agency will focus on its historically core areas, and no area is more fundamental to the SEC’s enforcement program than insider trading. Given this, it’s worth taking a quick primer on the current state of insider trading laws and its historical case theories. While, as they say, the past is not always predictive of the future, in this situation it likely will be. As then-acting enforcement director said in response to a question at SEC Speaks in March 2025, “Creativity is probably not where we [the enforcement staff] want to be.” If creativity is truly out of favor, we’d expect the SEC to stick to its tried-and-true fact patterns in the insider trading space.
Insider trading liability arises when a person trades securities based on material nonpublic information (MNPI) in breach of a duty of trust and confidence. The SEC generally brings insider trading claims under one of two theories of liability known as the classical theory and misappropriation theory. Under the classical theory, corporate insiders, such as officers, directors, or employees, trade based on MNPI in breach of a duty of trust and confidence to the corporation’s shareholders.[1] Under the misappropriation theory, a corporate outsider who learns of confidential MNPI and trades securities based on it breaches a duty of trust and confidence to the source of the information.[2] Corporate insiders or outsiders can also be liable if they tip another person with MNPI who trades securities based on the MNPI, provided the tipper receives a personal benefit in exchange for the tip.[3] The personal benefit received by the tipper can take various forms including pecuniary gain, reputational enhancement, or even merely an intent to make a gift to a relative or friend.[4] For the tippee to have liability, he or she must know or have reason to know that the tipper breached a duty of trust and confidence to either the corporation’s shareholders or the source of the MNPI.
In recent years, the SEC pursued several cases under an aggressive “shadow trading” theory of liability, with the most notable case being SEC v. Panuwat.[5] In that case, the defendant learned that his company, Medivation, Inc., was being acquired by Pfizer. Minutes after learning this information, Panuwat traded in the securities of a competitor, Incyte Corporation, by buying short-term, out-of-the-money call options. When news of the Medivation acquisition was disclosed publicly, the stock price of Incyte rose approximately eight percent, generating over $100,000 in profits for Panuwat. This case was widely criticized as being overly aggressive. However, the SEC was able to convince a San Franciso jury to find Panuwat liable after only a few hours of deliberation. The case is currently on appeal to the Ninth Circuit.
It remains to be seen if the SEC will pursue any shadow trading cases under this Commission. But the betting odds have to be against it. Current Commissioners Hester Pierce and Mark Uyeda served as counsel to Chairman Atkins during his first term as commissioner at the SEC. Pierce and Uyeda were highly critical of the shadow trading theory and issued dissents when the staff recommended cases for prosecution under that theory. Accordingly, with Chairman Atkins holding the majority of the Commission’s vote with Pierce and Uyeda at his side, we should expect that the shadow trading theory will be put on ice for the time being.
Another recent development are insider trading cases where Rule 10b5-1 trading plans were utilized to make the trades in question. Rule 10b5-1 trading plans are plans that officers or directors can utilize to make automatic, periodic, and predetermined trades in the future. The benefit is that Rule 10b5-1 trading plans, if properly implemented, offer an affirmative defense to insider trading allegations, even if the person possessed MNPI when the predetermined trades were executed. However, officers and directors cannot enter into the plan while in possession of MNPI.
A notable case in this area was SEC v. Peizer.[6] In that case, Peizer allegedly entered into two Rule 10b5-1 trading plans while knowing that his company was in jeopardy of losing its largest customer, who accounted for over half of its revenue. From May through August 2021, Peizer sold 645,000 shares under the plan, generating approximately $21 million. In August 2021, the company announced it had lost its contract with the customer, and its stock price dropped over 44%. Peizer was charged by the SEC and DOJ in parallel proceedings and was criminally convicted by a Los Angeles jury in 2024.[7] Although cases involving 10b5-1 trading plans are relatively new, we expect the SEC to continue enforcement activity in this area if the facts warrant it. There is likely consensus at the Commission level to prevent clear abuses of these trading plans. The possession of clear and tangible MNPI at the time of plan execution will be critical for those cases going forward.
At bottom, we expect the SEC to focus on relatively straight-forward insider trading cases against corporate insiders and outsiders under the classical and misappropriation theories while utilizing tipper/tippee liability where appropriate. The SEC likely will pursue cases with facts that squarely fit within the established legal framework and not push the boundaries or attempt to make new law. Such cases likely will contain the typical plus factors the SEC looks for such as extremely well-timed trades and communications, aggressive options trading, significant profits or losses avoided, the presence of insider trading rings, and the like. We will be monitoring the SEC’s enforcement cases this upcoming fiscal year to see if these predictions bear out — or if there are any surprises. We’ll keep you posted.
[1] Chiarella v. United States, 445 U.S. 222 (1980).
[2] United States v. O’Hagan, 521 U.S. 542 (1997).
[3] Dirks v. SEC, 463 U.S. 646 (1983).
[4] Salman v. United States, 580 U.S. 39 (2016).
[5] SEC v. Panuwat, Case No. 3:21-cv-06322-WHO (N.D. Cal.); https://www.foley.com/insights/publications/2024/03/sec-v-panuwat-shadow-trading-insider-trading-trial/.
[6] SEC v. Terren S. Peizer, et al., Case No. 2:23-cv-01511 (C.D. Cal.).
[7] United States v. Terren S. Peizer, Case No. 2:23-cr-00089-DSF (C.D. Cal.).
