As it turns out, Mark Cuban more or less confessed to two-thirds of the SEC’s case against him in a blog post from years ago. That raises the quandry: why is Cuban talking about this on his blog? He clearly didn’t believe he did anything wrong. It may be that Cuban just didn’t understand how wide of a net the insider trading rules cast.
The most basic type of insider trading involves someone inside a public company trading stocks based on information that is has not been made public. The head of a gaming company’s R&D division selling stock in his company after he discovers that the company’s user tests reveal gamers routinely commit suicide after playing, for example. That’s pretty open and shut: you work for a company, you have secret information, you aren’t supposed to trade on that.
But plenty of people have been accused of insider trading who don’t work for the company. They are not classic “insiders” at all. So how can you be an insider-trader when you are not really an insider? This is an important question because Cuban was not an insider, he didn’t work for the company or sit on its board. He was just an investor in the company.
There are lots of situations where you are allowed to trade on non-public information. If that information is simply your own investment conclusions, that’s fine. If you find a piece of paper on the street that turns out to be a merger term sheet, trade away. If you over hear two executives you don’t know talking in an airport about their company, you can trade. In each of this examples, you haven’t violated a promise to anyone not to trade or to keep something secret.
The SEC will likely rely on Cuban’s conversation with the company about the possibility of him investing in their private placement. They’ll claim that Cuban was trading on information he had a duty to keep confidential. Once you’ve got duty in place, the bar against trading kicks in. Basically, be careful what you agree to keep confidential because it may end up inhibiting your investment decisions in the future.
This type of insider trading means that you may become an insider without even knowing it. A good rule of thumb is probably to avoid trading on any non-public information unless you know for sure you have no other connection to the company and you haven’t made anything that could seem like a promise to keep the information secret.
Can Cuban be found liable for insider trading even if he believed what he was doing was within the rules? Unfortunately for Cuban, not understanding the rules is not a defence.
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