Mark Cuban has rallied a gang of prestigious Ivy League professors to his defence in his fight against the insider trading charges made against him by the Securities and Exchange Commission.
Cuban, you’ll recall, stands accused of selling stock in Mamma.com after obtaining information about a private placement of equity from the CEO. As we predicted when the case against Cuban was first announced, Cuban’s defence is built on the assertion that he didn’t have a fiduciary duty to not trade on the information.
Contrary to the impression many people have, insider trading rules don’t bar trading on all non-public information. It only bars insiders from making those trades. Since Cuban wasn’t an executive of the company, the legal bar against trading could only be triggered if another kind of fidicuary duty of confidentiality had somehow been created.
The Dallas Morning New reported this morning that law professors Allen Ferrell of Harvard, Jonathan Macey of Yale, the University of Chicago’s Todd Henderson, the University of California’s Stephen Bainbridge and Southern Methodist University’s Alan Bromberg had filed a brief on Mr. Cuban’s behalf Monday. (The aren’t being paid by Cuban, however.)
The professors argue that even if Cuban had agreed to keep the private placement confidential, this agreement wouldn’t be enough to create the kind of fiduciary relationship that would have brought Cuban under the purview of the insider trading regs.
“In the context of a business relationship, a confidentiality agreement alone is insufficient to create a fiduciary or similar relationship of trust and confidence between the parties,” the brief argues.
Cuban hasn’t admitted to having agreed to any such confidentiality agreement. But this argument by the professors is truly aggressive, testing the limits of insider trading law. It’s long been assumed that a confidentiality agreement was enough to create a fiduciary relationship, although the exact legal basis for this was far from clear.
The thing to remember about all this is that the boundaries of insider trading laws are very murky. One reason for this is that the “laws” are really just a bunch of court decisions based on a very brief rule approved by the Commission but never actually enacted as a statute by Congress. Most cases never actually go to court, as its far smarter for most defendants to agree to a settlement with the SEC rather than face the legal fees of defending themselves. But in going after a billionaire like Cuban, the SEC may finally have met its match.