SEC v. Mark Cuban: Memorandum in Support of Cuban's Motion to Dismiss

This post discusses the Memorandum of Law of Mark Cuban in Support of Motion to Dismiss for the case of SEC v. Cuban.

In previous posts we introduced the case, discussed the complaint and summarized insider trading law. Cuban received information regarding an upcoming private investment in public equity (“PIPE”) during a phone conversation with the CEO of Mamma.com. Shortly after this conversation, Cuban sold his entire 600,000 share holding of Mamma.com. The SEC alleged that Cuban breached a duty of trust and confidence to disclose or abstain.

As we discussed in our prior post on insider trading law, for 10b-5 liability under the misappropriation theory the SEC must show that Cuban had a fiduciary-like duty to keep the information he received confidential, and that he breached this duty by selling his shares.  Cuban asserted that regardless of whether Texas state law or federal common law applies, the SEC failed to adequately plead that either his 6.3% ownership of Mamma.com, or his 8 minute phone conversation with the CEO imposed a duty of trust and confidence to keep the information confidential.

Although the SEC’s complaint did not discuss Rule 10b5-2(b)(1), Cuban argued that the rule does not apply. The rule states that a duty of trust or confidence arises “whenever a person agrees to maintain information in confidence.” An SEC release that purports to limit this rule to family or non-business transactions supports Cuban’s argument, stating:

• “Rule 10b5-2 addresses the issue of when a breach of a family or other non-business relationship may give rise to liability under the misappropriation theory of insider trading.”

Further, Cuban’s brief cites Joon Kim where the court explained “The language of the release makes clear the new rule applies to family or other non-business relationships.” United States v. Joon Kim, 184 F. Supp. 2d 1006, 1015 (N.D. Cal. 2002).

Cuban also argued that Mamma.com knew that he would sell his shares when the company informed him of the PIPE. After Cuban spoke with the CEO, an internal email to the board stated “as anticipated he initially 'flew off the handle' and said he would sell his share.” Since the company knew Cuban would sell the shares, no deception occurred:

• “Because the deception essential to the misappropriation theory involves feigning fidelity to the source of information, if the fiduciary discloses to the source that he plans to trade on the nonpublic information, there is no ‘deceptive device’.”

United States v. O'Hagan, 521 U.S. 642, 655. This case will turn on how the court interprets the alleged confidentiality agreement as well as 10b5-2(b)(1).

The primary materials for this case are available on the DU Corporate Governance website.