Insider Trading: Lessons from the Mark Cuban Jury Verdict

The SEC’s closely watched insider trading suit against entrepreneur and investor Mark Cuban, the outspoken owner of the Dallas Mavericks basketball team, ended on October 16^th when a Dallas jury cleared Cuban of any wrongdoing.  The SEC alleged that Cuban violated the federal securities laws when he sold his entire stake in Mamma.com, a Canadian internet company, shortly after the company’s CEO informed Cuban that it planned to raise additional capital through a PIPE (private investment in public equity) offering.    According to the SEC, this was material nonpublic information that Cuban had agreed to keep confidential, and Cuban engaged in illegal insider trading by misappropriating it for his own use when he sold his stock.  The SEC relied upon the CEO’s testimony about his conversation with Cuban.  But Cuban denied being told to keep this information secret, and the jury sided with him, finding that the SEC failed to prove the key elements of its claim.

The jury decided that Cuban had not agreed to keep the company’s plans confidential and to refrain from trading on that information.  Indeed , the jury said that the CEO’s discussion of Mamma.com’s PIPE plans did not even constitute material nonpublic information.   In reaching that conclusion, the jury apparently credited expert testimony, presented by Cuban’s counsel, that the same information was publicly available through other sources and that the market’s reaction to the company’s ultimate announcement of its PIPE offering was not statistically significant.

The Cuban case is noteworthy for two reasons:

1.  The jury verdict suggests that proving insider trading may become increasingly difficult in this “information age” because, in many instances, the confidential  information at issue may have already been disseminated and priced into the stock.

2.  The district court judge instructed the jury that in order to show that Cuban engaged in insider trading under a misappropriation theory, the SEC had to prove that Cuban agreed (a) to keep the information confidential, and (b) not to trade on it or use it for his own benefit.  While the courts have not definitively resolved whether the second element is necessary,  the jury instruction in the Cuban case suggests that it is most prudent for companies to obtain written confirmation from recipients of confidential information that they will keep the information secret and refrain from trading on it.

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