Corporate Governance

SEC v. Mark Cuban: Dismissed

By J. Robert Brown

The district court dismissed the SEC's case against Mark Cuban today.  A copy of the opinion is posted on the DU Corporate Governance web site.

The case involved allegations that Cuban violated the prohibitions on insider trading when he received material non-public information from the CEO of Mamma.com Inc.  According to the SEC's complaint, the CEO asked and Cuban agreed to keep the information confidential.  Shortly after receiving the information, however, Cuban liquidated his position in Mamma.com, selling 600,000 shares.

Based upon the allegations in the complaint (many of which were disputed), there was little question that Cuban received material information before it was disclosed to the public.  As the trial court described (relying on the complaint), once the Company disclosed the news, "[t]rading in the company's stock opened substantially lower the next day and continued to decline in the days following."  Moreover, the complaint likewise set out facts indicating that Cuban benefited from the information.  As the complaint noted in para. 24:  "By selling his Mamma.com shares prior to the public announcement of the PIPE, Cuban avoided losses in excess of $750,000."

In short, if the complaint is to be believed, Cuban was given information in advance of the market that made the downward movement in the Company's share prices clear.  In other words, the loss avoided was not (again according to the complaint) a result of acumen but a result of a tip from a corporate insider.  To anyone without an understanding of the law, this represents quintessential insider trading.  Unfortunately, the law in this area interferes with common sense. 

The issue in the case was the nature of the relationship that Cuban had with the Company.  Insider trading does not arise from an unfair informational advantage.  It arises from a violation of a fiduciary duty or duty of trust and confidence.  Cuban argued that a duty of trust and confidence was fiduciary like and could not arise solely because he agreed to keep the material information confidential.  As the trial judge described:

• Specifically, Cuban contends that the SEC has alleged merely that he entered into a confidentiality agreement, which is of itself insufficient to establish misappropriation theory liability because the agreement must arise in the context of a preexisting fiduciary or fiduciary-like relationship, or create a relationship that bears all the hallmarks of a traditional fiduciary relationship;

As we shall set out, the court essentially found for the SEC on all major legal issues.  The relationship did not have to be a fiduciary one.  It was not controlled by state law.  The requisite duty of trust and confidence could arise from an agreement.  Yet the case was dismissed.  We'll explain the basis, an unusual one, in the next post.

Full post as published by The Race to the Bottom on July 17, 2009 (boomark / email).