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April 24, 2014

Texas District Court Addresses Misappropriation Theory of Insider Trading

The US District Court for the Northern District of Texas recently denied a defendant’s motion for summary judgment in a Securities and Exchange Commission civil enforcement action under the “misappropriation” theory of insider trading, finding that an implicit agreement may be sufficient to establish liability.

The SEC alleged that Defendant Mark Cuban (Cuban) violated federal securities laws by selling shares of stock in Mamma.com after learning material, nonpublic information concerning a planned private investment in a public equity (PIPE) offering by Mamma.com. The SEC alleged that Cuban agreed to maintain the confidentiality of the material, nonpublic information concerning the PIPE, and not to trade on the information, but then sold his stock. The SEC contended that these allegations were sufficient to establish Cuban’s liability under the “misappropriation” theory of insider trading.

Cuban moved for summary judgment, arguing that under the misappropriation theory the SEC was required to prove that there had been “a valid offer and acceptance plus a meeting of the minds [between Mamma.com and Cuban] supported by consideration, ”which are required to show a traditional contract. The court rejected that argument, ruling that the SEC needed only to establish that Cuban implicitly agreed to maintain the confidentiality of Mamma.com’s material, non-public information and not trade on it. The court found that the SEC had raised a triable issue of fact as to whether Cuban implicitly agreed to maintain the confidentiality of the material, nonpublic information and to not sell the company stock, including a conversation between Cuban and a Mamma.com executive where the executive characterized the information as “confidential” and Cuban reacted angrily to news of the PIPE. In light of this and other evidence, the court denied Cuban’s motion. 

 

SEC v. Cuban, Civil Action No. 3:08–CV–2050–D (SAF) (N.D. Tex. March 5, 2013).

©2014 Katten Muchin Rosenman LLP

About the Author

Bruce M. Sabados, Financial Institutions Attorney, Katten Muchin Law Firm
Partner

Bruce M. Sabados concentrates his practice in complex commercial litigation, with an emphasis on securities- and financial services-related matters and secured lender litigation. He represents both plaintiffs and defendants in a variety of commercial matters in federal and state courts and in arbitration. His clients include securities firms, international banks, hedge funds, high net worth individuals and asset-backed lenders. Bruce handles matters involving fraud, restrictive covenants, breaches of contract, business torts and Racketeer Influenced and Corrupt Organizations Act (RICO). He...

212-940-6369

About the Author

Joseph E. Gallo, Litigation Attorney, Katten Muchin Law Firm
Associate

Joseph Gallo concentrates his practice in securities litigation and dispute resolution matters. 

212-940-6549

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