SEC vs. Mark Cuban

I have recently filed an amicus brief on behalf of myself and Professor Bainbridge of the UCLA Law School, Professor Jonathan Macey of Yale Law School, Professor Alan Bromberg of SMU Law School and Professor Henderson of the University of Chicago Law School in the litigation filed against Mark Cuban by the SEC in the United States District Court for the Northern District of Texas.

The SEC complaint essentially alleges that Mark Cuban committed insider trading when, according to the complaint, he sold stock in a company (Mamma.com) in which he was a large shareholder (but not a director or officer) after receiving material, non-public information from the company. The basis for the SEC’s claim of insider trading is the allegation (hotly disputed) that there was a confidentiality agreement with Mr. Cuban covering this material, non-public information.

In our amicus — which can be found here — we argue that even if there was a confidentiality agreement (i.e. accepting all of the SEC’s allegations as true), as a legal matter Mr. Cuban could not have committed insider trading. The Supreme Court in U.S. v. O’ Hagan, 521 U.S. 642 (1997) emphasized that only if a defendant has breached a fiduciary or similar relationship of trust and confidence can the defendant be found to have engaged in the requisite deception through non-disclosure. Under both state and federal common law, a confidentiality agreement alone creates only an obligation to maintain the secrecy of the information, not a fiduciary or fiduciary-like duty to act loyally to the source of the information. As a result, if the SEC’s Rule 10b5-2(b)(1) is read as creating insider trading liability solely on the basis of a confidentiality agreement, this rule is an invalid exercise of the SEC’s rulemaking authority.

Of course, neither I nor any of the professors that signed the amicus brief were compensated in any way for our efforts.