Biotech executive Matthew Panuwat bought options on another drug company's stock and earned a windfall of $120,000.
The Securities and Exchange Commission now says he committed insider trading, even though he didn't buy his employer's stock and didn't have inside information about the company he bet on.
The case, which goes to trial next month, has become the latest test of insider trading law. Congress has never defined what it means, leaving regulators and courts across the country to decide what qualifies, a volatile process that sometimes leads appellate courts to rein in what they see as excesses.
Defense lawyers have dubbed Panuwat's case the first involving "shadow insider trading," a label that describes executives making well-timed bets in the shares of other companies. The SEC alleges Panuwat purchased options tied to the shares of Incyte, a rival drugmaker because he knew they would pay off when the market heard Pfizer was buying his company, Medivation, in 2016.
No court has ever tackled the idea that executives can go too far when they deploy their specialized knowledge or expertise to trade in the shares of rivals, said Karen Woody, a professor at the Washington and Lee University School of Law.
"I do think this is a push of the law and they are seeing if they can get a court to bless what is a bit of a stretch of the existing parameters," Woody said of the SEC's case.
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