Yesterday, the SEC won the latest round in its high-profile insider trading case against Dallas Mavericks owner Mark Cuban. The Fifth Circuit Court of Appeals reversed the July 2009 trial court decision in Cuban’s favor that had dismissed the SEC’s case. The SEC will now be permitted to pursue its claims against Cuban.
The SEC alleged that Mark Cuban sold 600,000 shares of Mamma.com stock after he was informed by the company’s CEO of an upcoming PIPE offering. According to the SEC complaint, Cuban misappropriated confidential information when he sold Mamma.com stock after agreeing to maintain the confidentiality of the material non-public information about the PIPE offering. Under the misappropriation theory of insider trading, a person engages in unlawful insider trading when he “misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information.” The SEC’s Rule 10b5-2 provides that accepting information pursuant to a confidentiality agreement creates a duty not to trade on that information.
Earlier this year, in an issue of SRZ Securities Litigation, Regulation & Enforcement Developments, we identified the Cuban case as one of the key “Enforcement and Litigation Cases to Watch in 2010” because, as noted, the trial court rejected the premise of Rule 10b5-2 and found that despite Cuban’s agreement to keep the information confidential, he had no duty to refrain from trading.
On appeal, the Fifth Circuit declined to take on the significant legal questions decided by the trial court, but instead took a different view of the facts alleged by the SEC. The Court determined that the SEC’s complaint could be read to allege that Cuban had agreed both to keep the information about the PIPE offering in confidence and not to trade on that information. Because the Court found the SEC to have alleged an agreement not to trade, the Court did not reach the issue of whether a confidentiality agreement standing alone would be sufficient to support insider trading liability. The case will now proceed to the discovery stage of litigation to develop a factual record, which may ultimately form the basis for additional significant rulings in this area.
This decision highlights how unsettled the law of insider trading is, and how important it is for market participants to conduct themselves with the greatest care as the law develops.
For those interested in reading the Fifth Circuit Court of Appeals decision, please click here.