Tuesday, November 18, 2008

Cuban Case and Confidentiality

There is another interesting aspect to the Cuban insider trading case that I didn't address in detail in my earlier post on the Mark Cuban insider trading case.

I discussed materiality, touched on "non-public" and damages. The last problem for the SEC is whether Cuban had any duty not to trade. Not everyone who has inside information is prohibited from trading. In order for someone to be liable for insider trading, they must have obtained the information in some fraudulent way, or in the breach of a fiduciary duty. Either they have the information because they were an "insider" or because they obtained it illicity from someone else.

I won't go into the details, and as always, Profession Bainbridge from the UCLA School of Law does a great job explaining the legal concepts in his post post, "Insider Trading Charges Against Mark Cuban".

So, in addition to proving that the information was material, and non-public, since Cuban is not an "insider", the SEC will have to prove that Mark Cuban breached a duty to someone in obtaining the information.

That is the reason why, as I noted, the SEC constantly repeats the allegation that the information was given to him AFTER he was told it was confidential, or AFTER he agreed that he would treat it as confidential. The SEC is alleging that there was some sort of agreement between Cuban and the CEO, and that Cuban breached the agreement by trading on the information.

The question becomes, can the CEO of a public company voluntarily provide material, non-public information to someone, and prevent that someone from trading? Is so, it is a great way to keep your largest shareholder from selling his stock - call him up and give him some inside information. He can't sell!

That of course, is not the law, and without an agreement by Cuban to keep the information non-public, the case is a non-starter. Professor Bainbridge goes a step further, and argues that even if Cuban agreed to keep it confidential, his trading would not violate the insider trading laws. But the Professor also says that this theory has not been tested in the courts.

Which means that SEC vs. Cuban might turn out to be a very significant case.

PS - to all of those posting all over the web about Cuban going to jail - he is not going to jail based on this case, this is a civil case, the SEC does not have the authority to put anyone in jail. That could happen in the future, but there is nothing in this case to suggest that there would be a criminal prosecution. Heck, it's not even clear that there is a viable civil case here.