Securities & Exchange Commission v. Cuban
2010 U.S. App. LEXIS 19563, 620 F.3d 551, 2010 WL 3633059 (2010)
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Rule of Law:
A duty to disclose or abstain from trading under the misappropriation theory of insider trading can be established by an agreement not to trade that is plausibly inferred from the totality of the circumstances, including the parties' conduct and communications, even without an explicit promise to refrain from trading.
Facts:
- Mark Cuban owned a 6.3% stake in Mamma.com, Inc., a publicly traded search engine company.
- In June 2004, Mamma.com's CEO contacted Cuban to invite him to participate in a planned private investment in public equity (PIPE) offering, which would likely dilute the value of existing shares.
- Before disclosing the information about the PIPE, the CEO informed Cuban that the information was confidential, and Cuban agreed to keep it confidential.
- Upon learning of the PIPE, Cuban became upset and stated to the CEO, "Well, now I’m screwed. I can’t sell."
- Cuban later spoke with Mamma.com's investment banker and received additional confidential details about the PIPE, including that shares would be sold at a discount to the market price.
- Minutes after speaking with the investment banker, Cuban instructed his broker to sell his entire 600,000-share stake in Mamma.com.
- The following day, after Cuban had sold all his shares, Mamma.com publicly announced the PIPE offering.
- By selling before the announcement, Cuban avoided losses of over $750,000 as the company's stock price subsequently dropped significantly.
Procedural Posture:
- The Securities and Exchange Commission (SEC) filed a civil complaint against Mark Cuban in the U.S. District Court for the Northern District of Texas, alleging insider trading.
- Cuban filed a motion to dismiss the complaint for failure to state a claim under Fed. R. Civ. P. 12(b)(6) and 9(b).
- The district court granted Cuban’s motion to dismiss, finding that the SEC's complaint failed to allege that Cuban had agreed not to trade on the information, only that he had agreed to keep it confidential.
- The SEC, as appellant, appealed the dismissal to the U.S. Court of Appeals for the Fifth Circuit, with Cuban as the appellee.
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Issue:
Does a complaint plausibly state a claim for insider trading under the misappropriation theory where it alleges facts, such as a confidentiality agreement and the recipient's own statements, that support a reasonable inference of an agreement not to trade on the confidential information received?
Opinions:
Majority - Patrick E. Higginbotham
Yes. A complaint plausibly states a claim for insider trading under the misappropriation theory where the alleged facts, taken as a whole, support a reasonable inference that the parties had a shared understanding that the recipient of confidential information would not trade on it. The court reasoned that the district court read the SEC's complaint too narrowly by concluding it alleged only an agreement to maintain confidentiality. Viewing the allegations in the light most favorable to the SEC, Cuban's statement, "Well, now I'm screwed. I can't sell," combined with the context that the information was shared for the sole purpose of evaluating participation in the PIPE, creates a plausible inference that both parties understood trading was forbidden. This shared understanding is sufficient at the pleading stage to establish the requisite duty of trust and confidence under the misappropriation theory, and the case should proceed to discovery to determine the actual nature of their agreement.
Analysis:
This decision clarifies the pleading standard for misappropriation liability, establishing that an implicit agreement not to trade, inferred from circumstantial evidence, can be sufficient to create the necessary duty of trust and confidence. It lowers the initial hurdle for the SEC in bringing such cases, allowing them to survive a motion to dismiss without alleging an express, explicit promise not to trade. The ruling emphasizes the fact-intensive nature of determining whether a duty exists, pushing the resolution of such questions past the pleading stage and into discovery. This makes it more difficult for defendants like Cuban to obtain early dismissals in insider trading cases based on the absence of a formal non-trading agreement.
