On November 17th, 2008, the SEC charged internet entrepreneur Mark Cuban with insider trading for selling 600,000 shares of the stock of Mamma.com (an Internet search engine company) on the basis of material non-public information concerning an impending stock offering. The SEC alleges that in June, 2004 Mamma.com invited Cuban to participate in a stock offering where the stocks would be sold below the prevailing market price. Cuban, an owner of 600,000 shares, did not like that his holdings would be diluted with the below market price stock sale. So he sold all of his holdings.
After Cuban sold his holdings, Mamma.com announced the offering and the stock price went down by 9.3% the next day. The SEC alleges that Cuban avoided losses in excess of $750,000 by selling his stock prior to the public announcement of the offering, and says this is illegal insider trading. It’s pretty obvious and easy to prove Cuban traded while in possession of material non-public information. However, what is not clear is whether Cuban promised or agreed to keep this information private and not to trade based on it.
Eight months later, U.S. District Judge Sidney Fitzwater threw out the case.
“Cuban cannot be held liable under the misappropriation theory of insider trading liability, even accepting all the well-pleaded facts as true and viewing them in the light most favorable to the SEC,” wrote Fitzwater. The main reason is that the SEC did not have evidence that Cuban undertook a duty, expressly or implicitly, to not trade or other otherwise use material nonpublic information.
It’s obvious that Cuban benefited from this information, yet the government could not send him to prison because he did not have a duty to keep the information private and he did not agree to keep it private. So if you are on a plane and happen to hear a private conversation that contains material non-public information, you can still trade on it and you won’t get in trouble. In one sense, Cuban’s insider trading case resembles the 1983 Dirks vs. SEC case.
Check back for more information on that.