What is interesting about Mark Cuban’s insider-trading defence thus far is that he is not disputing that he:
- Received material non-public information from the company’s CEO, and
- Sold the stock based on this information.
Instead, Mark is basing his defence on a legal technicality: That he didn’t agree to keep the information secret (thus forming a “duty of confidentiality” that effectively made him an insider).
According to Mamma.com’s CEO, after Mark received the material non-public information, he was furious: “Well, now I’m screwed. I can’t sell.” If the CEO’s recollection is accurate, Mark probably thought he couldn’t sell because he had received material non-public information. Thanks to the “duty of confidentiality” test, he may actually have been wrong about this. But in any event, he then went ahead and sold.
It is possible that what Mark did between the call with the CEO and the call with his broker was talk to an attorney who said, “Did you agree to keep the info confidential? No? Then you can sell.” This, too, seems unlikely, however: Any attorney looking out for his client’s interest would err on the safe side and note that perception is reality.
As John Carney suggests, Mark is rich and stubborn enough to take this all the way to the Supreme Court, at which point the law will probably be more clearly defined. In the meantime, investors who have close relationships with CEOs should probably pray that Mark’s “duty of confidentiality” defence holds up. Because if it doesn’t, you’re quickly going to get into a grey area in which contact of any kind between an investor and a CEO is risky in that it could be construed as transferring material non-public information.*
* Having worked on the Street for a decade, I’ve always found it preposterous to think that there will ever be a “level playing field” between investors who meet with managements and those that don’t. More information can be transmitted through a CEO’s facial expression when asked a tough question than in a 200-page SEC filing. Institutional investors sell stocks based on this sort of “body language” all day long. Up to this point, this sort of information has not been judged to violate insider trading law–even though it is highly material and non-public. If Mark Cuban loses his case, this could change.
But there are plenty of problems with the “duty of confidentiality” test, too: For example, what if both CEOs AND investors started relying on it? Imagine if a CEO wanted to preserve his/her credibility with key investors before delivering bad news. Imagine if he/she called and said, “I’m sorry to have to tell you this, but we’re going to blow our quarter by a mile.” Does anyone really think that the big investor should be allowed to sell just because he or she didn’t agree to keep the info confidential? If Mark’s defence holds up, it would be perfectly legal.
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