On December 14, 2009, without ruling on the merits of Cuban’s claim, the court granted a period of discovery.  However, the court warned the litigants that this was not to be a “fishing expedition,” and the grounds on which Cuban relied in his Motion should be the presumptive limits of discovery.

After this discovery period, which included many extensions and an unsuccessful conference, both Cuban and the SEC filed briefs on March 29^th that stated the other side had asserted privileges in withholding documents. In his brief, Cuban argued the SEC has only produced 199 documents and cited privilege over 602 items in “an obvious attempt to shield its misconduct and frustrate the Court’s Order.” On the other hand, the SEC asked the Court to compel Cuban “to provide full, accurate and complete answers and produce, or identify as privileged with appropriate factual and legal basis, all responsive documents.”

The U.S. District Court, Northern District of Texas is expected to make a ruling on this issue in the near future.

The primary materials for this post can be found on the DU Corporate Governance Website.

On January 15, 2010, the SEC filed the Motion pertaining to three FOIA requests stated in Cuban’s complaint.  The SEC sought a thirty-six month extension to process the requests in order to avoid disrupting its standard  “First In First Out” (“FIFO”) FOIA processing system, which places FOIA requests into a FIFO track for processing based on the order received.  The Motion relates to 107 boxes of documents that the SEC claimed must be reviewed line by line before they may be turned over to Cuban or withheld and catalogued in a Vaughn Index.  A Vaughn Index is an affidavit identifying withheld record, accompanied with a brief explanation of the relevant FOIA exemption’s application to the record. In support of its argument that courts routinely grant such stays, the SEC cited cases in which courts have granted stays of more than a year.  The SEC requested a 36-month stay in order to prevent “inequitable line jumping” by Cuban disrupting the SEC’s standard FIFO procedure. 

Cuban originally submitted FOIA requests to the SEC for documents and records relating to 20 broad categories of information.  The SEC responded to Cuban’s requests by either producing the requested records or withholding records pursuant to one of nine FOIA exemptions.  The three categories of records named in its motion to bifurcate and stay remain unprocessed, and include records related to (1) internal investigations of alleged unethical instructions to close cases and pursue investigations, allegations of conflict of interest and investigative misconduct, allegations of retaliatory investigations, and allegations of leaking confidential documents to the press; (2) Ian, Irving, or Michael Kott (a Canadian family previously investigated for boiler room schemes and alleged to have had a significant influence on Mamma.com); and (3) requests related to Copernic Inc, (a former Mamma.com subsidiary). 

First, citing case law, the SEC claimed that, generally, courts should grant administrative agencies additional time to complete review of records relating to FOIA requests upon a showing that (1) exceptional circumstances exist; and (2) the agency is exercising due diligence in responding to the requests.  Second, citing case law, the SEC articulated the standard for granting stay in the D.C. Circuit.  An agency must show: (1) that the agency is burdened with an unanticipated number of FOIA requests; (2) that the agency resources are inadequate to process the requests within the time limit set forth by the statute; (3) that the agency exercises “due diligence” in processing FOIA requests; and (4) that the agency shows reasonable progress in reducing its backlog of requests.

The SEC asserted it met the standards to stay FOIA proceedings set forth by the D.C. Circuit.  First, the SEC argues that the number of FOIA requests received by the agency has increased over 300% from 2001 to 2009, averaging 738 requests per month.  This is a much larger volume than originally expected.  Second, the SEC claimed that its 28 employee FOIA staff is inadequate to process the exceptionally high volume of requests received within the statutory period, because in addition to responding to requests for records, it also must handle FOIA litigation.  Third, the SEC argued that it exercised due diligence in processing Cuban’s FOIA requests, because it assigned case numbers to the requests and corresponded with Cuban about the status of the requests.  Finally, the SEC claimed it reduced its backlog of requests by 95 percent since 2006, from 10,400 to 490.  The SEC asserted that this reduction, coupled with a 20 percent reduction in median FOIA request processing time represented “reasonable progress” according to the standards set forth by the D.C. Circuit. According the Motion, FOIA plaintiffs should not be entitled to “jump to the front of the line merely because they filed a lawsuit.”

The SEC moved to bifurcate three categories of information requested by Cuban in his FOIA suit to compel records and stay the proceedings relating to these three requests until the SEC has time to process them according to its standard FIFO track system.  We will post on the ruling on this issue as it is made.

Cuban argued the District Court correctly dismissed the SEC’s case because (1) Cuban’s supposed confidentiality agreement (“the Agreement”) did not give rise to a duty of disclosure, and therefore breaching the Agreement did not constitute fraud; (2) Cuban’s trading was not a breach of the Agreement, and thus there is no basis for fraud liability; (3) Cuban’s alleged statement expressing concern for his inability to trade was neither a confirmation of an earlier agreement not to trade, nor a separate agreement not to trade; and (4) the SEC’s reliance on Rule 10b-5(2)(b)(1) is unavailing because it was improperly applied by the SEC in this case and does not apply to business relationships. 

First, Cuban claimed that even if he entered into a confidentiality agreement with the CEO of Mamma.com, prior to their conversation about the PIPE offering, it did not give rise to a duty of disclosure.  Therefore, even if Cuban would have breached the agreement, it could not form the basis for fraud liability based on the misappropriation theory of insider trading alleged by the SEC.  The misappropriation theory prohibits trading on material, nonpublic information in breach of a duty of disclosure to the source of the information.  Cuban argued that a duty of disclosure, akin to a fiduciary duty, arises only from a “relationship of trust and confidence” and the SEC failed to allege that the Agreement created this type of duty.

Cuban further argued that even if a court found that the agreement gave rise to a duty of disclosure, he would not have breached the duty simply by liquidating his Mamma.com stock holding.  The duty of disclosure would only have required him to keep the information about Mamma.com’s PIPE offering confidential, but would not have prohibited trading.  Cuban claimed he kept the information confidential and trading Mamma.com stock did not amount to a disclosure of confidential information. 

Similarly, Cuban argued that even if he entered into a confidentiality agreement with the CEO of Mamma.com, he did not breach the Agreement by selling his Mamma.com stock. Cuban claimed that the SEC alleged only that he agreed to keep the information about Mamma.com’s upcoming PIPE offering confidential.  Cuban asked the court to “reject the SEC’s self-serving attempts to transform a bare confidentiality agreement into a no-trade agreement.”  Specifically, he argued, “Mamma.com’s supposed understanding that [the Agreement] contained a no-trade agreement is factually unsupported and legally irrelevant” because the SEC did not allege that Mamma.com sought anything more than a confidentiality agreement with Cuban. Moreover, according to Cuban, contract law requires an objective finding that there was a “meeting of the minds” on the existence of a no-trade agreement.  The SEC did not establish an objective “meeting of the minds,” and therefore, could not incorporate a no-trade agreement into the “bare” confidentiality agreement. 

The SEC supported its argument that a no-trade agreement existed through a statement Cuban allegedly made after agreeing to keep his conversation with Mamma.com’s CEO confidential.  Cuban, upset with Mamma.com for its proposed PIPE offering, supposedly exclaimed, “Well now I’m screwed; I can’t sell.” Cuban argued that this statement “was neither a confirmation of an earlier agreement not to trade, nor a separate agreement not to trade.” Cuban argued the SEC only alleged that he agreed to keep information about the PIPE offering confidential, but did not allege that he entered into a no-trade agreement.  Therefore, “there can be no reasonable inference that Cuban acknowledged an agreement not to trade.” Cuban further argued that his statement could not have confirmed an earlier agreement not to trade, as it would have constituted past consideration in violation of contract law.  It also was not a separate no-trade agreement, because it lacked consideration necessary to form a valid contract. 

Finally, Cuban argued that the SEC’s reliance on Rule 10b-5(2)(b)(1) (“the Rule”) is “unavailing.” Cuban claimed the SEC applied the Rule improperly, and further, that the Rule applies only to “family and personal” relationships, not business relationships.  Cuban, citing numerous cases, argued that the “mere breach of a confidentiality agreement does not fall within the scope of §10(b)”; thus the SEC exceeded its authority by applying the Rule in this manner.  Cuban cited the SEC’s own releases and commentary to support his assertion that the Rule intends that a breach of a confidentiality requirement can only “form the basis for insider trading liability when the parties to the agreement have an existing family or other personal relationship.”  Thus, the Rule cannot impute liability on Cuban because the SEC failed to allege that he had a family or personal relationship with Mamma.com or its CEO.

Therefore, Cuban argued, the circuit court should affirm the district court’s dismissal of the case. 

Primary materials for this post are available on the DU Corporate Governance website. 

The parties request the discovery deadlines be extended as follows:  (1) February 16 for responses to document requests and interrogatories; (2) February 22 to begin depositions; (3) March 1 for the filing of motions to compel; (4) if no motion to compel is filed, discovery would be completed by March 9; (5) if a motion to compel is filed, all depositions should be concluded within 14 days of the courts ruling on the motion; (6) Mr. Cuban’s supplemental brief and evidence appendix shall be filed within 21 days of the completion of discovery; (7) the  SEC’s supplemental brief and evidence appendix should be filed within 21 days of the filing of Mr. Cuban’s supplemental brief; and (8) Mr. Cuban’s supplemental reply brief shall be filed within 14 days of the SEC’s brief.

The Court granted this motion on January 22, 2010 extending discovery dates as requested by both parties.

The primary materials for this post are available on the DU Corporate Governance website.

First, the district court concluded an agreement to keep information confidential does not encompass an agreement not to trade. Therefore, trading securities even after a confidentiality agreement does not deceive the source of information.  The SEC argues that case law, logic, and experience make clear that a confidentiality agreement includes an agreement not to trade.  Citing United States v. O’Hagan, 521 U.S. 642 (1997), the SEC stated that when the Supreme Court adopted the misappropriation theory of insider trading it prohibited trading on the basis of material, nonpublic information as a breach of a duty to the source of the information.   Further, under Commission Rule 10b5-2(b)(1) it is unlawful to use or employ, in connection with the sale of any security, any manipulative or deceptive device.  The SEC argued that by its plain terms this regulation sets forth a duty on Cuban not to trade after receiving confidential information.  Finally, Commission Rule 10b5-2(b)(1) embodies a valid interpretation of the deception requirement of Section 10(b) and is entitled to Chevron deference. Under Chevron, courts must defer to the Commission’s interpretation of Section 10(b) if Congress has not forbidden the interpretation and it is “based on a permissible construction of the statute.”  In Section 10(b), a duty of trust or confidence may arise by agreement, and an agreement to maintain confidential information includes an agreement not to trade. The SEC argued its interpretation is the clear intent of Congress and its interpretation of “deceptive” is reasonable.  Therefore, because the commission’s interpretation of Rule 10b5-2(b)(1) is a valid, the court must defer to this interpretation pursuant to Chevron.

Second, trading on material, nonpublic information after agreeing to keep it confidential is deceptive under the more general terms of Section 10(b) and Rule 10b-5.  The SEC argued Cuban agreed to keep information confidential and, as discussed above, a confidentiality agreement encompasses an agreement not to trade. Therefore trading on this information is deceptive under Section 10(b).

Third, the SEC claimed its original complaint sufficiently alleged that Cuban explicitly agreed not to trade, making his subsequent undisclosed trading deceptive. The SEC stated that Cuban’s statement “Well, now I’m screwed – I can’t sell,” to Mamma.com’s CEO was an express and contemporaneous recognition that he agreed to abstain from trading on the basis of the confidential information he received. Thus, because Cuban agreed to keep this information confidential he deceptively breached his duty by selling his entire stake without disclosing to Mamma.com his plans to trade.

The SEC, therefore, argued the Fifth Circuit should reverse the district court’s ruling because Cuban did deceive Mamma.com.

The primary materials for this post are available on the DU Corporate Governance website.



First, the Reply argues that the SEC lacked both factual and legal support for its allegation that Mr. Cuban agreed to keep information confidential.  The SEC claims that when Cuban talked to Guy Fauré, Mamma.com’s CEO, about the upcoming PIPE offering, Mr. Cuban accepted a duty to keep this information confidential.  Although Mr. Fauré cannot remember the exact words of the conversation, the SEC contends Cuban must have acknowledged the information he was about to receive was confidential.  The Reply contends, however, that Cuban never “agreed” to a duty of confidentiality, only that he was receiving confidential information. The Reply contends that mere acknowledgement, or express recognition, of receiving confidential information did not constitute an agreement to keep that information confidential.

Second, Cuban argues the SEC could not establish a contractual duty to keep information confidential because there was no offer or acceptance.  Mr. Fauré never made an offer to Cuban because he never asked Cuban to keep the information confidential as a condition of receipt.  The Reply further contends that if Mr. Fauré’s statements could be construed as an offer, Cuban never accepted this offer.  Cuban stated “acknowledgement” does not constitute a promise to perform under an agreement.  Nor did his statement “now I’m screwed, I cannot sell” constitute acceptance as the court previous held.  Further, this statement could not be a valid acceptance because it came after the confidential information was conveyed and therefore the statement would be for past consideration.

Finally, the Reply argues the SEC does not rebut the instances of investigative misconduct and the court can characterize this non-responsiveness as evidence of lack of good faith.  First, the SEC failed to address the effects of Chairman Cox’s recusal from the Commission’s vote on whether to authorize the enforcement action.  Second, the SEC insists that it has no obligation to provide the Commission with Cuban’s Wells submission when in fact the federal regulation states the submissions will be forwarded to the Commission.  Third, when the SEC issued the Wells notice its investigation was not substantially complete and the SEC did not have sufficient evidence to bring an action against Cuban.  Fourth, the SEC failed to explain why the Mamma.com investigation was closed immediately before retaking Mr. Fauré’s testimony regarding Cuban.  Fifth, the SEC never addressed Cuban’s concerns regarding abuse of the Wells process in connection with re-taking Mr. Fauré’s testimony to force-feed the right answers to Mr. Fauré. 

The Reply contends the SEC knew all along that Cuban never entered into a confidentiality agreement with Mamma.com and still continued the case.  Therefore, it is appropriate for the court to sanction the SEC for its meritless case and award Mr. Cuban attorneys’ fees and expenses.

Primary materials for this case may be found on the DU Corporate Governance Website.

The federal standard for awarding attorney’s fees as a sanction for egregious behavior is extremely high and reserved for situations where the “very temple of justice has been defiled.”

The SEC alleges that each element of an insider trading claim were properly pled by: (1) Cuban accepting a duty to keep the information confidential, (2) Cuban knowingly breaching that duty, and (3) the information, on the basis of which he sold his Mamma.com shares, was material and nonpublic.

First the Response contends Mamma.com extensively discussed inviting Cuban to participate in the transaction and the need for confidentiality.  Mamma.com executives were aware they would be providing Cuban material, nonpublic information if they invited him to participate.  The board instructed the Mamma.com CEO to contact Cuban and ensure Cuban was aware he must keep the information confidential before the information was conveyed.

Second, the SEC argues Cuban accepted the duty of confidentiality.  Mamma.com’s CEO testified that while he cannot recall the specific words Cuban used in accepting the confidential information, he is certain that Cuban accepted.  Additionally at the end of the conversation Cuban stated, “well now I’m screwed. I can’t sell.” Cuban also e-mailed his broker the morning after he sold his shares seeking cover from possible insider trading allegations.  The SEC states that these facts provide sufficient factual basis for the SEC’s allegation that Cuban accepted a duty of confidentiality.  Furthermore, Cuban did not deny accepting this duty, but rather denied having the eight minute conversation with Mamma.com’s CEO.

Third, the SEC states the facts alleged are legally sufficient to prove an agreement to undertake a duty of confidentiality.  For a duty of confidentiality to attach, an investor must have the opportunity either (i) to accept a duty of confidentiality and its attendant restrictions in order to have access to the information, or (ii) to refuse to accept the duty and information, thereby avoiding any restrictions.  The duty cannot be imposed unilaterally.  The SEC contends the Mamma.com CEO testified under oath that he prefaced the conversation that he had confidential information to convey, and that Cuban accepted the duty of confidentiality.  The SEC states it is irrelevant that the CEO does not remember the explicit words Cuban used to accept the duty, because to reach an enforceable agreement it is not necessary for a recipient to say “I agree” or any specific magic words.

Finally the SEC argues Cuban’s allegations of investigative misconduct are baseless.  The SEC states that the unauthorized e-mails sent by Jeffrey Norris were unrelated to the investigation and litigation.  The investigation had reached an advanced stage before the Norris e-mails were sent and Norris was located in Fort Worth while the investigation was led out of Washington D.C.  Additionally, the SEC contends Cuban’s arguments about the Wells process are meritless because Cuban was not entitled to any “assurances” and Cuban’s untimely Well’s submission was still reviewed.  Also, the closing of the unrelated Mamma.com investigation had no influence on the investigation and was not in exchange for any testimony.  Lastly, the initiation of an internal investigation in response to a complaint from Cuban does not suggest improper conduct, especially when the complaint was part of an aggressive defense strategy.

Because the SEC demonstrated that Cuban’s agreement to maintain the confidentiality of the material, non-public information remains a disputed issue of fact and each of Cuban’s allegations of investigatory misconduct are without merit, the SEC has not acted in bad faith.  Therefore, the SEC argues Cuban’s Motion for attorneys’ fees should be denied.

The primary materials for this post are available on the DU Corporate Governance website.

We have a nice student post today on the motion filed by Mark Cuban for attorneys fees against the Commission alleging bad faith in connection with the investigation.  In the brief, there are the following quotes which the brief represents came from emails sent by an SEC attorney to Cuban:

Cuban argues the court should sanction the SEC because: (1) it can award fees either under inherent power or 28 U.S.C. § 2412(b); (2) the SEC acted in bad faith in bringing the suit; and (3) the fees are appropriate in this case. 

Section 2412(b) permits the court to award  attorneys’ fees and expenses against the government just like any other party.  28 U.S.C. § 2412(b).  This statute has been held to specifically include bad faith conduct both prior to and during litigation.  Bad faith includes abusive conduct that constitutes or is tantamount to bad faith.  Specifically, it is bad faith to institute an action where no reasonable attorney could conclude the elements of the claim could be established.

Cuban argues that the SEC acted in bad faith by  (a) ignoring exculpatory evidence; (b) initiating the Wells process and informing Cuban of plans to bring an action for insider training despite an absence of evidence of a confidentiality agreement; (c) improperly reviewing Cuban’s second Wells Submission; (d) closing its investigation into Mamma.com just days before seeking new testimony from key witnesses; and (e) taking testimony of Mamma.com’s CEO for a second time in hopes of getting him to change prior statements. 

Cuban asserts that the sole support for the SEC’s claim was Cuban’s alleged acknowledgement that information he received from Mamma.com’s CEO regarding its stock was confidential.  The Court addressed this issue in its decision dismissing the case and held there was no evidence of any type of confidentiality agreement.  Cuban contends the SEC brought the action in bad faith by making a factual assertion of this confidentiality agreement knowing the evidence flatly contradicted it.

Third, the Motion argues attorneys’ fees and expenses are appropriate in this case as a sanction to deter frivolous litigation.  Cuban states his attorneys’ fees and expenses have exceeded $1 million and an award of this magnitude will deter the SEC from pursuing future meritless claims.

Because the SEC pursued the insider trading claim against Mark Cuban knowing it lacked evidence of a confidentiality agreement, the SEC acted in bad faith in bring the suit.  Therefore because the SEC acted in bad faith, Cuban contends it is appropriate to sanction the SEC by awarding attorneys’ fees and expenses.

The SEC intends to resond to Cuban’s Motion for Attorneys’ Fees.  The SEC’s brief is due by September 30, 2009.  The blog will post on those arguments once the SEC files with the Court.

The primary materials for this post are available on the DU Corporate Governance website.

There are several problems with the analysis.  Despite the prodigious effort by the court to separate the concept of confidentiality and use, the two are not so clearly separated.  First, the purpose of confidentiality agreements is typically and inherently an attempt to prevent use.  Second, confidential information can easily be revealed through use.  Third, the interconnected nature of the concepts means that parties using the concept of confidentiality can easily have meant it as a synonym for use.  In other words, it is a matter of the intent of the parties. 

That the concept can encompass both can be seen by the language in Regulation FD, 17 CFR 243.100(b)(2).  Regulation FD prohibits intentional selective disclosure.  The regulation, however, exempts disclosure if made "To a person who expressly agrees to maintain the disclosed information in confidence";  the use of the term "confidence" in Regulation FD means that the recipient will not use the information to trade.  In other words, the concept of confidentiality encompasses use.

What will happen next?  Most likely, the SEC will file an amended complaint and allege that the parties intended the confidentiality agreement to encompass use.  To the extent the case remains good law, officers who disclose confidential information to shareholders will have to ask that it be kept confidential and not be used to trade.  In other words, the case will have limited impact.  Regulation FD may need to be amended.

Nonetheless, it shows the problems with the development of the law of insider trading.  The reality is that insider trading does not always encompass material non-public information deliberately passed along by corporate officers to someone they know will trade.  To ordinary investors, this looks terribly unfair and suggests that the trading markets are not open but fixed.

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.

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.

The next day, Judge Fitzwater filed another order setting the date for the oral argument to May 26, 2009, at 2:00pm. The details of the oral argument are as follows:

• Each side is allotted 30 minutes for argument
• Defendant may reserve up to 10 of his 30 minutes for rebuttal
• Demonstrative aids may be used at oral argument only if both of the following prerequisites are satisfied:

(1) the exhibit is a duplicate, enlargement, photograph, or computer-generated      representation of an exhibit that is already part of the motion record; and

(2) notice that the aid will be used during argument has been given to opposing counsel at least  10 days before the date for oral argument

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