The Securities and Exchange Commission’s insider trading charges against billionaire Mark Cuban could go all the way to the Supreme Court. Although most insider trading cases never even go to trial, Cuban’s case is very, very different.
Unlike your typical insider trader, Mark Cuban is a billionaire. He can easily spend millions of dollars on legal fees.He’s already shown his willingness to spend serious money for his defence by hiring high powered Washington DC securities and white collar crime lawyers. And he’s clearly ready for a a fight, posting his defence arguments on his blog and releasing his lawyers to talk to the press. The threat of mounting legal fees, one of the governments most powerful weapons in getting those accused of insider trading to settle, is useless against him.
What’s more, Cuban’s case is more complicated than most insider trading cases. Cuban’s defence rests on a legal technicality that is far from clear in legal precedents. He is arguing that he never agreed to keep sensitive insider information about Mamma.com’s planned PIPE offering confidential. That’s important because the legal doctrines of insider trading don’t bar all trading on non-public information. Instead, they bar corporate insiders with a duty of confidentiality from trading on that information. Cuban’s defence rests on his claim that he never agreed to keep the information confidential. If a court agrees, it may very well decide that Cuban was free to trade.
Few people understand, however, that the legal doctrines about insider trading are very fluid and unclear. They are built around a vague SEC rule, called 10b-5 by lawyers, that doesn’t clarify very much at all. The rule was passed in 1942 after a CEO who was publicly pessimistic about his company’s earnings was discovered to have purchased stock. Until then there had been no clear insider trading rules. The SEC passed it with almost no debate. It states, in full:
“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud,(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,in connection with the purchase or sale of any security.”That’s it. Everything else about insider trading has been developed by the courts and the enforcement practices of the SEC. Over the years the courts have developed an extensive doctrine of insider trading. But the thing about legal doctrines that aren’t well grounded in statute is that they can be changed if a court decides its previously announced rules were not exhaustive.
To put it more concretely, although Cuban’s claim that he was not an insider seems to rest on a factual question about whether or not he agreed to secrecy about the offering, the courts could decide that he engaged in insider trading even if he didn’t explicitly agree. That is, they might decide to expand the doctrines to catch his activities.
Cuban, with little incentive to back down, will likely appeal any such expansive legal interpretation all the way to the Supreme Court. That, of course, could take years. We won’t even pretend to predict what a court would decide.
In any event, the SEC’s enforcement powers are limited to a civil case that would only result in fines even if Cuban is found to have committed insider trading. So, even if he were to lose his case, Cuban will wind up at a basketball game that very same night.
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