SW Legal studies in Business

Shareholder Breached No Duty By Selling Stock After Being Provided Non-Public Information
Description

District court dismissed an SEC action against a shareholder of a private firm who was told, in confidence by the firm’s CEO, of a planned public offering. As the shareholder opposed the offering, he sold his shares. That breached no duty and was not a basis for a claim of insider trading based on misappropriation of information.

Topic

Securities Law

Key Words

Insider Trading; Misappropriation of Information; Duty

C A S E   S U M M A R Y
Facts

The SEC sued Mark Cuban, owner of the Dallas Mavericks, under the misappropriation theory of insider trading. The SEC alleged that after Cuban agreed to maintain the confidentiality of material, nonpublic information concerning a planned private investment in private equity (PIPE) offering by Mamma.com, he sold his stock in the company without first disclosing to Mamma.com that he intended to trade on this information, thereby avoiding substantial losses when the stock declines after the PIPE was publicly announced. Cuban owned 6.3% of Mamma.com when it was a private company and knew of the plan to go public. He opposed the PIPE because it would dilute the value of his shares. The CEO of Mamma.com claimed that Cuban promised he would not sell his shares before the public offering was announced, but he did. Cuban moved to dismiss the complaint for failure to state a claim on which relief can be granted. Five prominent securities law professors filed briefs (amici curiae) in support of Cuban’s position.

Decision

Motion granted. The SEC did not adequately allege that Cuban entered into an agreement with Mamma.com that could support shareholder liability under the misappropriation theory of insider trading. The SEC merely alleged that Cuban agreed to keep confidential whatever information Mamma.com’s CEO intended to share with him regarding the planned PIPE offering. The SEC did not allege that Cuban agreed to refrain from trading on information or otherwise use it for his own benefit. There was a unilateral expectation by the CEO that Cuban would not sell his shares; that is no basis for the SEC action as Cuban had the right to sell. Cuban did not share his information with third parties, so breached no duty to the corporation.

Citation

SEC v. Cuban, ---F.Supp.2d--- (2009 WL 2096166, N.D. Tex., 2009)

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