On Tuesday Dallas Mavericks owner Mark Cuban had his first hearing in an insider trading case brought by the SEC. In dispute is whether Cuban agreed to maintain the confidentiality of sensitive information about Internet search engine company, Mamma.com, only to then use such information to sell shares prior to public announcement of the information. The SEC alleges Cuban avoided more than $750,000 in losses by engaging in insider trading. The pleadings in the case are available here.
Some commentators claim the SEC is overreaching. Unlike traditional insider trading cases, Cuban was not a true insider such as a director, officer, or 10% shareholder, and he argues he was not someone who misappropriated confidential information. Cuban argues he was just a stockholder who received non-public information and traded on the basis of such information. Absent other facts, this is not illegal.
The SEC counters that Cuban had an oral agreement to keep information confidential and thus a duty that he breached when he traded on the confidential information. SEC Rule 10b5-2 states that a duty of trust or confidence exists in this context “whenever a person agrees to maintain information in confidence.” Cuban counters that this rule is either invalid or does not apply to business relationships.
The case highlights an important legal underpinning of insider trading: trading on non-public information is not illegal unless in doing so one breaches a duty of trust, either to one’s shareholders, employer, or the source of the information, depending on context. But if Cuban’s argument is that trading on non-public information is permitted as long as no duty of trust exists, the implication of this argument is that trading on non-public information is not that bad.
In short, the legal theory of the case conflicts with the general notion that trading on non-public information is not fair, regardless of whether a duty is breached. But, stock is sometimes like anything that can be bought and sold, and the law does not always require that buyers and sellers have the exact same information.