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Classroom Insiders

Classroom Insiders, Season 2 – A Deep Dive into Panuwat and Shadow Insider Trading

Welcome to Season 2 of Classroom Insiders, a podcast with Professor Karen Woody and her Insider Trading Seminar students from Washington and Lee University. They explore the arc and evolution of insider trading over the last century. Each episode will feature a discussion between Karen Woody and students about insider trading and regulation. Find out what the future lawyers of the university think about past and current legislation and learn more about this fascinating area of law.

In this episode of Classroom Insider Season 2, Professor Woody is joined by students Iyla and Mia to delve into the intricacies of insider trading law through the lens of the Panuwat case. The conversation focuses on Panuwat, a former executive at Medivation who utilized non-public information about Medivation’s acquisition by Pfizer to trade in Insight’s stocks, resulting in significant profits. This case is pivotal as it marks a notable expansion of insider trading law under the SEC’s ‘shadow trading’ concept, where the misappropriation theory and the collateral market connection were brought to a new light. The discussion covers the challenges and implications of this expansion, comparing it to previous cases like SEC v. Obis and highlighting the evolving nature of insider trading regulations through litigation rather than legislation. They also touch upon the potential future impacts of the ruling on corporate compliance and insider trading laws, making this episode essential listening for anyone in the compliance field.

Key highlights:

  • Panuwat Case Details and SEC Allegations
  • SEC’s Redefinition of Materiality
  • Historical Context: SEC v. OBIS
  • Debating the Fairness of the Panuwat Case
  • Potential Implications and Future of Insider Trading Law

Resources:

Washington and Lee School of Law

Professor Karen Woody

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Classroom Insiders

Classroom Insiders, Season 2 – Exploring the Complexities of SEC vs. OBIS and the Misappropriate Theory

Welcome to Season 2 of Classroom Insiders, a podcast with Professor Karen Woody and her Insider Trading Seminar students from Washington and Lee University. They explore the arc and evolution of insider trading over the last century. Each episode will feature a discussion between Karen Woody and students about insider trading and regulation. Find out what the future lawyers of the university think about past and current legislation and learn more about this fascinating area of law.

In this episode of Classroom Insider Season 2, Professor Woody chats with Noah Gallagher and Ahmed. Together, they explore the intricate details of the famous insider trading case, SEC vs. OBIS. The episode dives into the initial allegations, the roles of various individuals involved, and the complex theories of insider trading used in the case, including the classical and misappropriation theories. The discussion also highlights the various legal challenges and court rulings that shaped the case’s outcome, mainly focusing on fiduciary duty, personal benefit, and scienter requirements.

Listeners will understand how the courts handle insider trading cases and the nuances that legal practitioners face. Noteworthy is the conversation on the impact of the court’s interpretations on the personal benefit test and how this case stands about the broader legal landscape of insider trading.

Key highlights:

  • Overview of SEC vs. OBIS Case
  • Details of the Insider Trading Allegations
  • Theories of Insider Trading Explained
  • Court Proceedings and Initial Rulings
  • Appeal and Trial Outcomes
  • Implications and Legal Interpretations

Resources:

Washington and Lee School of Law

Professor Karen Woody

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Great Women in Compliance

Great Women in Compliance: Karen Woody on The Voice of Victims in Negotiated Plea Agreements

The recent Boeing plea agreement has led to many discussions about the role of victims in negotiated settlements, and today we have one of the top academic experts on the SEC and financial securities regulation, Karen Woody.  Karen is an associate professor at Washington & Lee School of Law. Karen and Lisa discuss why the Boeing case is a good example of who the victims are because the victims suffered a tragedy.  However, many other white-collar cases (we hope) are not as clear, especially in the FCPA bribery context, and what avenues of relief that others have, particularly in the international context.

Lisa and Karen also follow on the prior episode’s discussion of internal controls, particularly in light of the Solarwinds case. They talk about whether internal controls are the appropriate way for the SEC to pursue certain claims, such as cybersecurity or in a bribery case, and whether they should be limited to accounting provisions and whether other controls would be more appropriate, and if they don’t exist, should they?

Karen also shares her journey into academia and gives some practical tips for those who are interested in teaching and how to be resilient when one hits roadblocks. #GWIC is proud to announce that it has been nominated for the WomenInPodcastAwards. This is a people’s choice award and whether you vote for #GWIC or other nominees, we ask that you send the elevator back down by voting. Voting opens August 1, 2024, and details can be found on the #GWIC Linkedin page at http://www.linkedin.com/groups/12156164

Resources:

Join the Great Women in Compliance community on LinkedIn here.

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Blog

Panuwat-Shadow Insider Trading and Compliance

Karen Woody is one of the country’s top legal experts on the intricacies of insider trading laws. I recently had the chance to visit with her about a significant case which pushed the boundaries of the case law on this topic. It is the case brought by the SEC against Matthew Panuwat over shadow inside trading, which ended in a conviction against Panuwat. In addition to being a significant new step by the SEC, it  highlighted the need for organizations to navigate the ethical and practical considerations surrounding insider trading.

Panuwat, was a former senior director of business development at Medivation, an oncology-focused biopharmaceutical company. He was accused of using confidential information about Pfizer Inc.’s impending acquisition of Medivation to trade ahead of the news for personal gain. Instead of buying securities of Medivation, Panuwat purchased short-term, out-of-the-money call options of another comparable public company, Incyte Corporation, which he knew from his position at Medivation was ‘in play’.

The lessons from this case highlight the importance of stringent internal controls and policies to prevent insider trading and the misuse of material nonpublic information. It also underscored the need for companies to ensure that employees understand their legal and ethical responsibilities when handling sensitive information.

Woody emphasized the importance of understanding the restrictions imposed by insider trading laws, emphasizing that employees who have access to privileged information about their company cannot trade based on that knowledge. This fundamental principle serves as the cornerstone of insider trading regulations. She further explained the complexities surrounding the enforcement of such laws, pointing out the gray areas that often exist within the legal framework.

Woody laid out several key areas for consideration. The first was for companies to implement 10(b)(5)(1) Plans. Here Woody suggested the use of 10(b)(5)(1)  plans to regulate insider trading practices effectively. These plans dictate when and how company employees can trade stocks based on privileged information. Expanding this traditional mechanism for greater scope could help reduce the windows for legal insider trading and thereby minimize the risk of legal issues arising from insider trading activities. She stressed the importance of restricting employee trading to curb shadow trading and advocates for clear controls over business activities involving sensitive information to prevent breaches and violations.

Next is a more industry-wide prohibition of information. Through the implementation of an industry-wide prohibition on trading to prevent the misuse of inside information. The key is the non-public aspect of this information that someone in Company A can pick up or discern about Company B. By expanding ban regulations and limiting trading windows based on potential insider information, the aim is to enhance fairness and transparency in trading practices.

A third area is around the ‘gray areas’ present in current insider trading laws. By examining and refining existing regulations, the goal is to create a more robust legal framework that ensures compliance and integrity in financial markets. Insider trading laws are constantly evolving, making it crucial for businesses to stay up-to-date with the latest regulations. Regularly updating Insider Trading Policies ensures that employees are aware of their responsibilities and the consequences of engaging in insider trading. It also demonstrates a commitment to ethical behavior and compliance with the law.

It is important for both companies and employees to understand what constitutes material non-public information and the legal implications of trading on such information. Employees should be educated on the types of information that are considered material and the consequences of using it for personal gain. By keeping Insider Trading Policies current and relevant, businesses can better protect themselves from legal repercussions and reputational damage associated with insider trading incidents. It also helps in fostering a culture of integrity and accountability within the organization.

Your company should establish clear guidelines for reporting and investigating suspected cases of insider trading. Having a robust compliance program in place, including regular audits and monitoring, can help prevent and detect insider trading activities. It is also essential to ensure that employees are aware of their obligations under insider trading laws and the importance of upholding ethical standards in their conduct.

Woody highlighted the critical role that ethics and character play in decision-making, especially when dealing with privileged information. She underscores the ethical risks associated with insider trading, which involves breaching confidentiality and using non-public information for personal gain, thus posing a threat to the fairness of financial markets.

Preventing insider trading starts with creating a culture of transparency and ethical behavior within the organization. Encouraging employees to report any suspicious activities and providing clear guidelines on what constitutes insider trading are essential steps. Implementing regular training sessions on insider trading laws and consequences can also help raise awareness among employees.

The Panuwat case sheds light on how balancing legal versus illegal trading practices and defining material non-public information can be a challenging task. As Karen Woody aptly emphasizes, maintaining a strong ethical compass and upholding fiduciary duties are paramount in navigating the intricacies of insider trading laws.

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FCPA Compliance Report

FCPA Compliance Report – Karen Woody on Officers Duty of Oversight

Welcome to the award-winning FCPA Compliance Report, the longest running podcast in compliance. In this episode, Tom Fox welcomes Professor Karen Woody and they take a deep dive into the Segway case from Delaware.

The bottom line is that proving bad faith and breaching the duty of oversight remains a challenging task. The conversation delved into the fiduciary duties of directors and officers, specifically the duty of care and the duty of loyalty. The duty of care requires fiduciaries to be well-informed about material information and exercise prudence in decision-making. On the other hand, the duty of loyalty necessitates undivided interests towards the corporation, with no conflicts of interest or self-dealing.

The duty of oversight, derived from the landmark Caremark case in 1996, is an extension of the duty of loyalty. It requires the establishment of information reporting systems and compliance programs to inform senior management and the board about potential issues. There are two prongs to bring a duty of oversight claim: the systems or information prong and the red flag prong. The former focuses on the absence or ineffectiveness of systems, while the latter deals with the conscious disregard of red flags.

However, proving bad faith and breaching the duty of oversight is a high bar to clear. The Caremark standard is challenging to meet, and most cases are dismissed on a motion to dismiss. The recent Segway case, following the McDonald’s case, indicated a pushback against lowering the bar for officers compared to directors. The interpretation of the duty of oversight remains stringent, emphasizing the need for strong evidence of bad faith.

The conversation concluded by acknowledging the importance of context and the specific facts of each case. While there has been a slow march of weakening the Caremark standard in some cases, the facts in those instances were particularly egregious. The recent cases discussed in the episode did not exhibit the same level of egregiousness, leading to a retraction and a reaffirmation of the high bar set by the Caremark standard.

Resources:

Karen Woody on LinkedIn

Tom Fox

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