Texas District Court Addresses Misappropriation Theory of Insider Trading

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The US District Court for the Northern District of Texas recently denied a defendant’s motion for summary judgment in a Securities and Exchange Commission civil enforcement action under the “misappropriation” theory of insider trading, finding that an implicit agreement may be sufficient to establish liability.

The SEC alleged that Defendant Mark Cuban (Cuban) violated federal securities laws by selling shares of stock in Mamma.com after learning material, nonpublic information concerning a planned private investment in a public equity (PIPE) offering by Mamma.com. The SEC alleged that Cuban agreed to maintain the confidentiality of the material, nonpublic information concerning the PIPE, and not to trade on the information, but then sold his stock. The SEC contended that these allegations were sufficient to establish Cuban’s liability under the “misappropriation” theory of insider trading.

Cuban moved for summary judgment, arguing that under the misappropriation theory the SEC was required to prove that there had been “a valid offer and acceptance plus a meeting of the minds [between Mamma.com and Cuban] supported by consideration,” which are required to show a traditional contract. The court rejected that argument, ruling that the SEC needed only to establish that Cuban implicitly agreed to maintain the confidentiality of Mamma.com’s material, non-public information and not trade on it. The court found that the SEC had raised a triable issue of fact as to whether Cuban implicitly agreed to maintain the confidentiality of the material, nonpublic information and to not sell the company stock, including a conversation between Cuban and a Mamma.com executive where the executive characterized the information as “confidential” and Cuban reacted angrily to news of the PIPE. In light of this and other evidence, the court denied Cuban’s motion.

SEC v. Cuban, Civil Action No. 3:08–CV–2050–D (SAF) (N.D. Tex. March 5, 2013).

 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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