In a recent court hearing, the SEC claimed it could not begin document review until March 2011 and could not deliver requested records until 2012. The agency cited limited resources and a voluminous workload for the delay.   Cuban wanted to expedite the case and, as a solution to the SEC’s lack of resources, offered to pay for the review. The SEC, however, rejected Cuban’s offer because it did not want to send the message that wealthy litigants can “go to the front of the line.” 

Mark Cuban (“Cuban”) submitted two separate FOIA and the Privacy Act requests to the Securities and Exchange Commission (“SEC”) covering twenty categories of information. Responding to Cuban’s requests over a six month period, the SEC stated it “possessed no responsive records” relating to some categories, did not have any “means to conduct a reasonable search” for others, and claimed statutory exemptions for the remaining categories.  Cuban appealed the SEC’s responses and challenged the adequacy of its searches as well as the exemptions relied upon. 

First, regarding search adequacy, the court granted summary judgment for Cuban, holding the SEC did not conduct a satisfactory search under FOIA standards.  Agencies receiving FOIA requests must search in good faith for requested documents using methods reasonably expected to produce the desired information.  In addition, agencies must provide “a reasonably detailed affidavit, setting forth the search terms and type of search performed.”  Here, the SEC produced two employee declarations stating searches were conducted based on an understanding of SEC records and produced nothing.  The court held that both declarations were conclusory and lacked the detail necessary to assess the adequacy of the search. 

Next, the court denied summary judgment for several claims, holding the SEC provided inadequate information to determine the applicability of Exemption 2, Exemption 5, Exemption 6, and Exemption 7(C) and required the SEC to produce redacted versions of the documents withheld under each.

Specifically, Exemption 2 allows withholding information related solely to an agency’s internal personnel rules and practices.  5 U.S.C. § 552(b)(2).  The agency must show (1) the predominant purpose of the information is internal use, and (2) “that the material relates to trivial administrative matters of no genuine public interest.”  Here, the court held the information is not trivial and of genuine public interest because the primary purpose of the SEC is to investigate and prosecute fraud.

Next, the SEC relied upon Exemption 5 to withhold “inter-agency or intra-agency memorand[a].”  5 U.S.C. § 552(b)(5).  Exemption 5 integrates three civil discovery privileges: (1) the deliberative process privilege; (2) the attorney-client privilege; and (3) the attorney work-product privilege.

Under the deliberative process privilege, only predecisional deliberations are exempt from disclosure.  Here, the SEC asserted the records withheld consisted of internal e-mails and notes reflecting deliberations of whether an employee engaged in misconduct.  While emphasizing the privilege’s importance, the court found the SEC’s bare declarations did not show the documents were truly and entirely deliberative and therefore, summary judgment was not proper.

The attorney-client privilege requires an agency to show that (1) the information provided to its lawyers was intended to be confidential; and (2) was not disclosed to a third party.  Here, the SEC declarations merely claimed the privilege without specific facts showing the communications were confidential.  The court held that the declarations were too vague to warrant summary judgment. 

An agency can withhold documents as attorney work-product when the “materials were prepared in anticipation of litigation or for trial.”  Again the court rejected the SEC’s conclusory declarations that withheld records are work product without factual support and stated that the SEC’s cursory declarations do not warrant summary judgment.    

Exemption 6 authorizes an agency to “withhold personnel and medical files and similar files, the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.”  5 U.S.C. § 552(b)(6).  The SEC maintained that withheld records relate to an employee investigation and potential discipline.  The court also rejected the SEC’s minimum declarations and denied summary judgment.

Conversely, the court ruled in favor of the SEC withholding records under Exemption 7(A) so long as the investigation was continuing.  Exemption 7(A) permits an agency to withhold records compiled for ongoing law enforcement if disclosure could harm the enforcement action.  5 U.S.C. § 552(b)(7)(A).  Here, disclosure could reveal information about the investigation that would undermine it.

Finally, Exemption 7(C) authorizes withholding records compiled for law enforcement purposes that if disclosed “could reasonably be expected to constitute an unwarranted invasion of personal privacy.”  5 U.S.C. § 552(b)(7)(C).  The privacy interest must be weighed against the public’s interest in the information.  The SEC maintained the documents in question consist of internal e-mails concerning employment and disciplinary matters.  Here, the SEC failed to provide sufficient information for the court to weigh the privacy interest against the public interest in determining how an agency responds to potential employee misconduct and misuse of government resources.

Finally, the court stated it would consider the merits of any future challenges regarding requests made under the Privacy Act.  The court also denied without prejudice the SEC’s request for an additional three years to respond to the remaining three FOIA requests and will conduct a status conference to determine the amount of additional time the SEC has to process the requests.

The primary materials for this case may be found on the DU Corporate Governance website. 

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

Additionally, the court denied without prejudice both Cuban’s and the SEC’s motions to compel responses to interrogatories and production of documents, and Cuban’s motion for a protective order.  The court noted, however, either party may adopt its previously written brief if necessary to revive a previously denied motion. 

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

On April 2, 2010, four law professors (Professors Bainbridge, UCLA, Ferrell, Harvard, Henderson, Chicago, and Macey, Yale), (“the Professors”) filed an amicus curiae brief in the Fifth Circuit Court of Appeals supporting Mark Cuban (“Cuban”) in the Securities and Exchange Commission’s (“SEC”) appeal of the Northern District of Texas’ dismissal of the insider-trading case against Cuban. 

The district court originally granted Cuban’s motion to dismiss because the SEC failed to adequately allege that (1) Cuban owed a “duty of disclosure” to keep the information about Mamma.com’s private investment in public equity (“PIPE”) offering confidential, and therefore Cuban’s trading was not fraudulent as required by Section 10(b) and Rule 10b-5 of the Securities Exchange Act (“the Act”); and (2) Rule 10b-5(2), as applied in this case, exceeds the SEC’s rulemaking authority and could not be relied on.

The Professors submitted their brief because “the district court’s opinion raised important concerns related to the application of the federal laws regarding insider trading,” and failure to address these concerns could detrimentally affect corporate law and the national securities markets.  Brief of Amici Curiae Law Professors in Support of Defendant-Appellee at 1, SEC v. Cuban, No. 09-10996 (5th Cir. Apr. 4, 2010). 

First, the Professors argued that insider trading liability under Section 10(b) and Rule 10b-5 exists “only where the defendant has breached a fiduciary duty or a similar relationship of trust and confidence.” Citing Supreme Court precedent, the Professors argued that Section 10(b) and Rule 10b-5 “cannot be used to remedy all instances of unfairness” or informational disparities.  Rather, intent to deceive, manipulate or defraud must be shown, otherwise liability could be imposed for non-fraudulent trading, thereby eviscerating Section 10(b)’s threshold requirement of fraudulent conduct. 

As applied to this case, the Professors argued the SEC failed to allege that Cuban breached a fiduciary or similar duty of trust and confidence when he sold his Mamma.com stock after learning about its PIPE offering. “Merely entrusting a person with confidential information,” the Professors contended, cannot “create a fiduciary relationship.” The Professors maintained that despite Cuban’s confidential conversation with Mamma.com’s CEO, Cuban’s affiliation with Mamma.com was limited to that of a shareholder.  Therefore, Cuban, a non-fiduciary, did not breach any duty by selling his shares, nor did he deceive Mamma.com’s CEO. 

Alternatively, the Professors advanced several policy arguments in favor of Cuban’s position that the breach of a mere confidentiality agreement does not amount to breach of a fiduciary duty, and, therefore, insider trading liability.  First, they argued that a contrary ruling would create unclear standards regarding the type of conduct sufficient for liability under the Misappropriation Theory of insider trading.  The Professors reasoned that this uncertainty would impose costs on the securities markets that eventually would be passed along to the public.

Additionally, the Professors argued that the SEC justifications for expanding insider trading liability could not overturn Supreme Court precedent. Here, the SEC attempts to convert Cuban’s potential breach of contract into fraudulent conduct via its interpretation of the Act’s Rule 10b5-2.  This, the Professors claimed, is an attempt to propose a federal standard for confidentiality agreements and the relationship between shareholders and corporations, both areas traditionally governed by state law. Congress has never given the SEC authority to create a federal fiduciary principal that would override state standards, and “Supreme Court jurisprudence cautions against the formulation of broad new duties absent some explicit evidence of Congressional intent.”

Finally, the Professors argued that expanding insider trading liability under Section 10(b) and Rule 10b-5 would violate the purpose and policy of the securities laws. According to the Professors, the Misappropriation Theory concerns communications between the trader and his information source; public disclosure is largely irrelevant to the theory.  The Professors claimed, “something akin to theft is the gravamen of the Misappropriation Theory’s prohibition on insider trading.” Therefore, the Misappropriation Theory does not advance the Act’s objective of encouraging public disclosure of information, as liability under the theory can be avoided without information being disclosed publicly. 

In sum, the Professors argued that Cuban did not owe a fiduciary duty to Mamma.com, and therefore could not be held liable for insider trading.  Further, the SEC’s attempt to expand insider trading liability contravenes Supreme Court precedent and legal policy.

Despite the detailed and impressive arguments made in this brief, the court did not follow the suggested analysis.   

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

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.  

The SEC's case against Mr. Cuban centers on the sale of his stake in Mamma.com just before the company announced a private placement of shares. The SEC alleges that Mr. Cuban had conversations with the then CEO of Mamma.com and allegedly agreed to keep the information confidential.  The SEC alleges that Mr. Cuban engaged in insider trading when he sold shares in Mamma.com. 

Today's ruling by the Fifth Circuit reverses a lower courts ruling from July of 2009, dismissing the SEC's case against Mr. Cuban, which we wrote about here.

We will write a more detailed post on today's opinion soon.

A copy of today's opinion can be found on the DU Corporate Governance Website.



First, in its initial brief, the SEC argued that Cuban’s explicit agreement to keep the information about Mamma.com’s Private Placement in Public Equity (“PIPE”) offering confidential included a duty of non-use.  Therefore, Cuban’s failure to publicly disclose that information prior to trading constituted a breach of that duty and amounted to deception under the misappropriation theory of insider trading.  Under the misappropriation theory “a person commits fraud ‘in connection with’ a securities transaction . . . when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information.”  United States v. O’Hagan, 521 U.S. 642, 652 (1997).  The SEC argued that an agreement to keep information confidential necessarily creates an agreement to keep the information “in trust,” which includes the duty to refrain from using the information for personal gain. 

Further, the SEC replied to Cuban’s contention that a traditional fiduciary duty is required for insider trading liability by asserting that language in O’Hagan indicates a “similar obligation” would suffice.  The SEC argued that a duty not to use the information suffices for application of the misappropriation theory.  Therefore, the SEC is not required to plead a traditional fiduciary duty because Cuban is bound by the duty not to trade implied in the confidentiality agreement.

Second, the SEC argued that the 1934 Act Rule 10b5-(2)(b)(1) (the “Rule”) establishes “a duty of trust or confidence” when a person agrees to keep information confidential.  Moreover, the SEC’s interpretation of the Rule is a reasonable interpretation of Section 10(b)’s deception requirement and is therefore entitled to Chevron deference.  Additionally, the SEC maintained that the Rule is applicable to business relationships because it applies to all agreements of confidentiality.  The SEC contended that the cases cited by Cuban, supporting the notion that the Rule applies only to close personal or familial relationships, are irrelevant because the plain language of the regulation controls.

Next, the SEC argued that the evidence supports a reasonable inference that Cuban explicitly agreed not to trade, and therefore a duty of non-use was established.  The SEC relied upon Cuban’s statement, “Well, now I’m screwed. I can’t sell,” as primary evidence that he explicitly agreed not to trade.  Further, the SEC relied upon two internal Mamma.com emails reflecting that Cuban agreed not to sell.  Therefore, the SEC contended that notwithstanding a duty imposed by the Rule, a duty of non-use of the information was sufficiently alleged, despite Cuban’s claim that the complaint did not plead evidence that “Mamma.com’s CEO sought an agreement not to trade.”

Finally, the Reply Brief addressed an Amicus Brief filed by four law professors in support of Cuban.  The SEC argued that the brief presents a “fundamental disagreement with the controlling Supreme Court decision[s]” regarding the misappropriation theory and not a disagreement about its application to this case.  The SEC relied upon O’Hagan in arguing that “deception through nondisclosure” was the primary objective of the adoption and application of the misappropriation theory.  Therefore, the application of the misappropriation theory is warranted here. 

The SEC maintained the district court’s judgment should be reversed.

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

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.