The issue was whether the alleged confidentiality agreement orally executed by Cuban before trading in the Company's shares was enough to create a duty of "trust and confidence" that meant he couldn't trade on the information.
The trial court found first that the matter was not controlled by state law (concerning the definition of duty). Second, the court found that the requisite duty of trust and confidence could in fact arise from an an agreement. As the court noted:
- Because under O’Hagan the deception that animates the misappropriation theory involves at its core the undisclosed breach of a duty not to use another’s information for personal benefit, there is no apparent reason why that duty cannot arise by agreement. Further, recognizing that a duty analogous to the fiduciary’s duty of “loyalty and confidentiality” can be created by agreement fully comports with Chiarella’s teaching that the duty must arise out of a relationship between specific parties and not the mere possession of confidential information. The court therefore concludes that a duty sufficient to support liability under the misappropriation theory can arise by agreement absent a preexisting fiduciary or fiduciary-like relationship.
Ultimately, however, the court found that the alleged agreement was not sufficient to create the requisite duty of trust and confidence. It had to be more than an agreement to keep the non-public information confidential. There also had to be a component of the agreement that prohibited the use (read the right to trade on) the information. As the court concluded:
- The agreement, however, must consist of more than an express or implied promise merely to keep information confidential. It must also impose on the party who receives the information the legal duty to refrain from trading on or otherwise using the information for personal gain. With respect to confidential information, nondisclosure and non-use are logically distinct. A person who receives material, nonpublic information may in fact preserve the confidentiality of that information while simultaneously using it for his own gain. Indeed, the nature of insider trading is such that one who trades on material, nonpublic information refrains from disclosing that information to the other party to the securities transaction. To do so would compromise his advantageous position. See O’Hagan, 521 U.S. at 656 (“The misappropriation theory targets information of a sort that misappropriators ordinarily capitalize upon to gain no-risk profits through the purchase or sale of securities.”). But although conceptually separate, both nondisclosure and non-use comprise part of the duty that arises by operation of law when a fiduciary relationship is created. Where misappropriation theory liability is predicated on an agreement, however, a person must undertake, either expressly or implicitly, both obligations. He must agree to maintain the confidentiality of the information and not to trade on or otherwise use it. Absent a duty not to use the information for personal benefit, there is no deception in doing so. As in the fiduciary context, the deception occurs when a person secretly trades on confidential information in violation of the source’s legitimate and justifiable expectation that the recipient will not do so.
In other words, a confidentiality agreement wasn't enough. It had to include, apparently, an express provision prohibiting the recipient from trading on the basis of the disclosed information.
The Cuban agreement lacked this restriction, according to the court. This was true even though Cuban allegedly responded to the information by saying: “Well, now I’m screwed. I can’t sell.” As the court concluded:
- Thus while the SEC adequately pleads that Cuban entered into a confidentiality agreement, it does not allege that he agreed, expressly or implicitly, to refrain from trading on or otherwise using for his own benefit the information the CEO was about to share. Although at one point Cuban allegedly stated that he was “screwed” because he “[could not] sell,” this appears to express his belief, at least at that time, that it would be illegal for him to sell his Mamma.com shares based on the information the CEO had provided. This statement, however, cannot reasonably be understood as an agreement to sell based on the information. Further, the complaint asserts no facts that reasonably suggest that the CEO intended to obtain from Cuban an agreement to refrain from trading on the information as opposed to an agreement merely to keep it confidential.
In short: "Outside a fiduciary or fiduciary-like relationship, a mere unilateral expectation on the part of the information source —one that is not based on the other party’s agreement to refrain from trading on the information —cannot create the predicate duty for misappropriation theory liability."
We've posted the complaint and other primary material on the DU Corporate Governance web site.