Not In My House: Mark Cuban Defeats The SEC's Insider Trading Charges

The high profile long-running saga between Mark Cuban -- entrepreneur, television personality, and billionaire owner of the Dallas Mavericks -- and the SEC has finally ended with Mr. Cuban emerging victorious. On October 16, 2013, after less than four hours of deliberation, a jury found in favor of Mr. Cuban on an insider trading claim arising out of his purchase and sale of shares of the company Mamma.com in 2004. While the verdict ultimately vindicates Mr. Cuban, defense counsel should take note of how the court defined insider trading in Mr. Cuban's case.

CUBAN SELLS SHARES OF MAMMA.COM AND THE SEC CALLS FOUL

In 2004, Mr. Cuban was investing in an online search engine called Mamma.com. After purchasing a large stake in the company, he had conversations with the company's CEO and investment bank about the company's strategy for raising additional capital through a PIPE transaction. After expressing his displeasure with their approach, Mr. Cuban sold his stock. Later that day, the strategy was announced to the market and price of the stock dropped, ultimately losing almost 40 percent of its value over the span of nine days. By selling his shares prior to the announcement, Mr. Cuban saved more than $750,000 in potential losses. Based on these facts, the SEC filed suit against Mr. Cuban on November 17, 2008, alleging insider trading in violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934.

AT WHAT POINT DOES A CONVERSATION CROSS THE LINE AND BECOME THE BASIS FOR INSIDER TRADING?

The issue at the heart of the Cuban case was what type of relationship could ultimately lead to an insider trading claim. The SEC brought suit under the misappropriation theory, which the Supreme Court recognized in United States v. O'Hagan, 521 U.S. 642 (1997). Under this theory a person violates Section 10(b) "when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information." The Court described this duty as "a duty of trust and confidence," which traditionally arose from a fiduciary relationship between the person conveying the information and the person trading.

In 2000, the SEC looked to codify further and, to some observers, expand the scope of the insider trading laws. The Commission adopted Rule 10b5-2, which provides additional guidance regarding the relationships that give rise to a "duty of trust and confidence" for...