Corporate Governance

SEC v. Mark Cuban - Insider Trading Case Reinstated - Opinion Summary

By Andrew Woods

On September 21, 2010, the Fifth Circuit Court of Appeals reinstated the Securities and Exchange Commission's ('SEC') insider-trading case against Mark Cuban ('Cuban') and remanded the case for further proceedings. The appellate court believed the 'case should not have been dismissed [by the district court] and must proceed to discovery.'

The SEC's original case against Cuban arose from events surrounding a proposed Private Placement in Public Equity ('PIPE') offering of Mamma.com stock. Cuban owned a six percent stake in Mamma.com.  The company planned to raise additional capital through a PIPE, and informed Cuban of its plans after Cuban assured Mamma.com's CEO that he would keep any information that he received confidential.   

Apparently upset about potential losses and dilution of his shares that would likely result from the PIPE, Cuban allegedly reacted to the news and exclaimed to Mamma.com's CEO 'Well now I'm screwed, I can't sell.' The CEO referred Cuban to the investment banker in charge of the PIPE for more information. Cuban ultimately sold all of his Mamma.com stock. 

The SEC alleged that Cuban violated Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act, and Rule 10b-5 by liquidating his position in Mamma.com in breach of his duty to Mamma.com's CEO.  Specifically, the SEC alleged that Cuban's agreement to keep information about the PIPE offering confidential encompassed a duty not to trade on the information.  Under the misappropriation theory of insider trading, Cuban breached his duty to Mamma.com by selling his stock. 

The district court dismissed the SEC's case, finding that the SEC's complaint alleged only that Cuban agreed not to disclose confidential information but failed to allege that Cuban agreed not to trade.  The Fifth Circuit disagreed with this finding.  Reviewing the decision de novo and in a light most favorable to the SEC, the court concluded it was plausible that 'both sides understood there was to be no trading before the PIPE.' 

Specifically, the appellate court viewed Cuban's statement in the complaint lamenting his inability to sell his stock as  'expressing his belief . . . that it would be illegal' to do so.  Moreover, an internal Mamma.com email stating that Cuban 'will sell his shares which he can not [sic] do until after we announce [the PIPE]' provided additional support for the conclusion that both sides understood there was to be no trading until after announcement of the PIPE. 

Additionally, the court found it persuasive that, after stating he could not sell his stock, Cuban requested the terms and conditions of the PIPE and learned 'that the PIPE was being sold at a discount to the market price . . .' The court found it plausible that both parties 'understood, if only implicitly, that Mamma.com would only provide the terms and conditions of the offering to Cuban for the purpose of evaluating whether he would participate in the offering, and that Cuban could not use the information for his own personal benefit.'

Finally, the court declined to adopt Cuban's position that trading on confidential information does not amount to disclosure of the information. Based on the 'factually sparse record,' the court held it 'is at least equally plausible that all sides understood there was to be no trading before the PIPE.'  This conclusion rendered it unnecessary to address the validity of the SEC's Rule 10b5-2(b)(1) or the question of what constitutes a relationship of trust and confidence. 

The Fifth Circuit held that 'the allegations, taken in their entirety provide more than a plausible basis' to find there was more than a simple confidentiality agreement, and that a no-trade agreement existed between Cuban and Mamma.com's CEO.

The primary materials for this case are posted on the DU Corporate Governance website.  

Full post as published by The Race to the Bottom on September 27, 2010 (boomark / email).