Last week, the U.S. District Court for the Northern District of Texas dismissed the Texas securities fraud charges that the Securities and Exchange Commission had filed against billionaire Mark Cuban. The SEC had asked the judge to close the case after deciding not to file an amended complaint against the Dallas Mavericks’ owner. The court’s ruling now makes way for the SEC to consider whether to appeal the decision.
The SEC is accusing Cuban of engaging in insider trading. Cuban found out from the chief executive officer of Mamma.com that the company was going to raise money via a PIPE deal or public entity or a private investment. Cuban, who owned a 6.3% stake (600,000 shares) in the company, verbally said he wouldn’t tell anyone about the PIPE offering and then sold his whole stake in the company right before the PIPE deal became public knowledge. As a result, the SEC says that Cuban prevented himself from losing $750,000 when company’s stock dropped.
The SEC had filed its Texas insider fraud trading lawsuit against Cuban based on the “misappropriation theory.” In United States v. O’Hagan in 1997, the US Supreme Court ruled that a defendant is in violation of the antifraud provisions of the 1934 Securities Exchange Act if he or she “misappropriates” confidential information for trading purposes and breaches the duties of confidentiality and loyalty.
The SEC’s Rule 10b5-2 was put in place in 2000 to clarify what that duty entailed. In Cuban’s case, the duty of confidence or trust exists when a person agrees to keep information confidential.
The district court presiding over the SEC securities fraud lawsuit against Cuban, however, said that the defendant would have misappropriated the information if, in addition to promising to keep what he knew confidential, he had agreed that he wouldn’t trade based on the information that was given to him. However, the judge agreed with the defense that Cuban never promised that he wouldn’t trade. His legal representatives say there was no reason for him to abstain from trading.
Related Web Resources:
SEC Won’t File Amended Complaint Against Mark Cuban, The Wall Street Journal, August 12, 2009
SEC Files Insider Trading Charges Against Mark Cuban, SEC, November 17, 2008
Related Web Resources:
The SEC Complaint (PDF)