The Securities and Exchange Commission (“SEC”) has filed suit against Mark Cuban for insider trading. In brief, the SEC complaint alleged that Cuban, a large shareholder in Mamma.com, learned of an upcoming PIPE offering in Mamma.com. He agreed to keep that information confidential and to not sell his shares until after the company made the information public. The complaint alleged that Cuban, in violation of his agreement, sold his shares, and that these actions violated 10(b) and 10b-5.
Five law school professors (Professors Bainbridge, UCLA, Bromberg, SMU, Ferrell, Harvard, Henderson, Chicago, and Macey, Yale), filed an amici curiae brief in support of Cuban’s motion to dismiss. They argued that even if there was a confidentiality agreement, which there might not have been, Cuban still did not commit insider trading.
They made three arguments. First, Cuban did not have the requisite relationship of trust and confidence required under O'Hagan. The amicus noted that in U.S. v. O’Hagan, 521 U.S. 642 (1997), the Supreme Court applied the misappropriation theory of insider trading to trading in violation of a fiduciary or similar “relationship of trust and confidence.” As a result, the mere execution of a confidentiality agreement, as Cuban is alleged to have done, does not create a fiduciary or similar relationship.
Second, the behavior did not violate Rule 10b5-2. The provision provides that a duty of trust and confidence arises "[w]henever a person agrees to maintain information in confidence." The Rule, according to the Amicus, applied only to non-business relationships. The amicus relied on language in the adopting release noting that the Rule was intended to apply to "a breach of a family or other non-business relationship. "Exchange Act Release No. 43154 (August 15, 2000). As least one court has apparently agreed with this interpretation. See SEC v. Talbot, 430 F. Supp. 2d 1029, 1061 n.91 (C.D. Cal. 2006).
Third, even if the rule applied, it was an invalid exercise of the SEC's rulemaking authority. The professors argued that the SEC promulgated Rule 10b5-2 after the Court’s opinion in O’Hagan and that the standard used in the Rule was more expansive than what the Supreme Courts set out because it created liability for a relationship of “trust or confidence” rather than “trust and confidence.” Creating liability under 10b5-2’s “trust or confidence” would expand the scope of the O’Hagan test and would overstep its rule making authority citing Santa Fe Industries, Inc. v Green, 430 U.S. 462 (1977); Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976).
The primary materials for this post are available on the DU Corporate Governance Website.
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