Mark Cuban may have earned himself a permanent place in the history of financial regulation today.
Unlike most people accused of insider trading by the SEC, Cuban had the wherewithal and the will to fight back in a highly unconventional way. Cuban didn’t try to deny the facts alleged by the SEC. He challenged the SEC’s legal theory, arguing that trading on information he got from the CEO of Mamma.com was perfectly legitimate.
From the start, Cuban had an advantage. Despite a popular misconception about insider trading, it’s just not true that there’s a rule against trading on corporate secrets—the stuff the legal eagles call “material non-public information.” There’s only a rule against insiders doing it.
Cuban wasn’t an insider in the classical sense because he didn’t work for Mamma.com. The SEC had to argue that the circumstance under which he obtained the non-public information made him an insider. Their argument was that Cuban’s conversations with Mamma.com’s CEO created a relationship of trust that gave rise to a duty of confidentiality. And the SEC believes that once you have a duty not to disclose corporate secrets, you also have a duty not to trade on those secrets.
We expected the case would turn on whether or not Cuban had a duty of confidentiality. And if it ever goes to trial—the SEC has 30 days to refile their case—that will be one of the central contentions. But things never got that far.
The judge put an end to this case early by challenging the SEC’s interpretation of insider trading law. He said that there is a difference between a duty of confidentiality and a duty not to use insider information for your own benefit. This means that even if Cuban had a duty of confidentiality, he might not have committed any wrong-doing. After all, he didn’t disclose anything. He just traded on it. And no one ever claimed he also had a duty not to trade on top of the duty of confidentiality.
This is a pretty bold challenge by the judge to the SEC’s view of insider trading. It basically puts a new step in proving insider trading, requiring the SEC to prove both a duty of confidentiality and a duty not to trade. This is an argument that’s been floating around academia for quite some time. But this is the first time I am aware of that it’s be accepted by a federal court.
It also explains why the judge gave the SEC another bite at the apple. There’s no way the SEC could have known its theory of insider trading was wrong. So now they’ll get to submit a new case against Cuban that will claim he had a duty not to trade.
But since no one has ever had to make this kind of case before, it should be really, really interesting.
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