The Mark Cuban Verdict–A Takeaway

If you are a fan of sports, the reality television show Shark Tank or the nuances of insider trading laws (no doubt the smallest of these three fanbases), then you probably followed with some interest the SEC’s four-year pursuit of Mark Cuban. You may remember that the SEC claimed that Cuban had sold his Mamma.com stock in violation of Rule 10b-5 after the CEO called him with material non-public information about a pending PIPE offering. The SEC alleged that the sale allowed Cuban to avoid losses of $750,000.

The case weaved its way through the federal courts until this past October, when a Texas federal district court jury found for Cuban. A key point in the trial, and the reason this is of more than just celebrity-watching interest, was the Court’s jury instruction, which specified seven necessary elements of proof for insider trading liability. One of those elements required that the jury find that Cuban

“agreed…to keep the material, nonpublic information confidential and not to trade on or otherwise use the information for his own benefit.” (emphasis added)

By requiring agreement both as to confidentiality and non-use, the Court specifically rejected the SEC’s long-standing position (and the view of most commentators) that an agreement as to confidentiality is sufficient to prove misappropriation insider trading liability.

What does this mean for most companies?

It’s important to note that this is the first and so far only federal court decision to require proof of an agreement not to use or trade in order to establish liability for misappropriation insider trading. Furthermore, the SEC is unlikely to appeal the decision to the Fifth Circuit Court of Appeals, in part because it may not want an appellate court ruling on this issue. The decision is not binding on any other court and is unlikely to deter future SEC enforcement actions, even where there is no evidence of a non-use agreement. Therefore, it’s probably business as usual in that respect.

However, in light of the Cuban verdict, particularly given its high profile, it would be advisable to be sure going forward that all recipients of material, non-public information agree not only to keep that information confidential, but also not to trade on it or use it for their own benefit. Implementing this change requires only a quick review of, and possibly update to, the proscriptive language used in your:

• Investors/analyst conferences,
• Meetings or calls with third parties, and
• Non-disclosure agreements.