On Tuesday, March 5, the SEC’s insider trading case against billionaire Dallas Mavericks owner Mark Cuban took a new twist when a federal district court in Texas declined to end the 2008 civil enforcement action. The SEC alleges that Cuban engaged in insider trading when he sold 600,000 shares of Mamma.com Inc., a company in which he was the largest shareholder, after learning the company intended to offer a private investment in public equity (PIPE). Although the Court characterized the evidence against Cuban as “spotty,” “brief,” and “ambiguous,” it nevertheless concluded that the case should be allowed to proceed to trial because, according to the Court, certain understandings that Cuban would not disclose or trade based upon confidential information he received, may have been “implicit” in the communications between Cuban and company insiders. Unfortunately, the Court’s decision, a self-proclaimed “close” call, further muddies the waters of insider trading law. Indeed, from the very beginning, the case against Cuban has been an example of the author’s previous assertion that insider trading, which is not defined by statute, but by an amalgamation of judicial opinions, has morphed into an area of unsettled law, leaving potential traders at a loss for what behavior is permissible.
The SEC’s case is based on the misappropriation theory of insider trading pursuant to which a defendant can be liable if he misappropriates confidential information for trading purposes in breach of a duty owed to the source of the information. According to the SEC’s interpretation of its Rule 15b5-2(b), misappropriation cases can be brought even if a defendant has no fiduciary relationship with a firm, but agrees not to disclose the confidential information and not to trade or use the information to his own advantage. The SEC alleges Cuban deceived the company by promising not to disclose information about the PIPE or sell his stock, but selling anyway and avoiding losses incurred by the company after the placement was publicly announced. In 2009, the district court dismissed the SEC’s complaint because the agency failed to allege that Cuban had agreed not to trade based on the information imparted to him. The Fifth Circuit reversed and remanded the case back to the lower court without reaching the legal merits, finding instead that the SEC’s complaint was sufficient.
PIPE deals, which often have the effect of diluting the value of existing shares in the company, are typically offered in lieu of a second public offering when a company is seeking an infusion of new equity. Evidence submitted to the Court indicates that when Cuban was contacted by Mamma.com Inc.’s CEO, he reacted angrily to the news of the PIPEand “said something like, ‘Now I’m screwed. I can’t sell.’” According to the SEC, in another call between Cuban and Arnold Owen, the head of the investment bank that was handling the PIPE, Cuban requested more information about the PIPE and failed to disclose his intent to sell his stock in the company. Cuban asserts that although he was invited to learn additional information about the PIPE, he informed Owen that he was not going to participate and that he would sell his shares. Thus, the primary issue in the case is whether Cuban entered into an agreement with the company to maintain the confidentiality of the PIPE and not to sell his shares in Mamma.com during the course of these conversations.
In this week’s decision denying summary judgment, the Court rejected Cuban’s argument based on contract law that the agreement could only be established with proof of an offer, acceptance, and bargained-for exchange, asserting instead that the SEC only needed to show that Cuban implicitly agreed to maintain the confidentiality of the PIPE deal and not trade on it, seemingly suggesting that an implicit agreement is somehow different than a typical binding contractual agreement.
Perhaps the Court used the term “implicit” to define Cuban’s expression of his intentions or perhaps it was used to characterize the nature of the conversations between the parties. Regardless, the Court’s lack of clarity on this point, along with the still open issue of whether the SEC’s broad application of Rule 15b5-2(b) to non-fiduciary relationships is acceptable, tees up for appellate review questions about the type of agreement required to support a misappropriation case. We have not heard the last of the insider trading case against Mark Cuban.
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