I blogged recently on the district court decision tossing the SEC's insider trading case Dallas Mavericks' owner Mark Cuban. As one of the amici who filed a brief in support of Cuban, I was disappointed that the court did not accept our argument that the requisite relationship of trust and confidence that is a core element of the insider trading prohibition did not require a fiduciary relationship. Although the court (wrongly, IMHO) held that a contractual duty sufficed, the court (correctly, IMHO) held that such a duty had to go beyond one of mere confidentiality and include an express obligation not to use the information.
I question the Court's interpretation of the O'Hagan case. First, since the O'Hagan duty is based on deception of the owner of the information, arguably a lie to the owner about the intent to keep the information confidential should be enough.
Second, nobody's really talking about a bona fide fiduciaryrelationship. As I discussed in my Are Partners Fiduciaries, 2005 Illinois Law Review 209, a fiduciary duty is a duty of unselfishness that arises from delegation of control, not merely an expectation of confidentiality arising from a promise or relationship.
Third, even if the promise is only confidentiality rather than specifically non-use, it may be possible to argue that trading alone outed the information and therefore breached confidentiality. Ironically, this invokes the efficiency-based theory against insider trading liability -- that it informs the market.
Finally, I would not that there's a significant practical difference between the amici's argument and the one the court accepted in Cuban's case. The SEC need now only show that the agreement Cuban made implied non-use. This may not be easy, but I submit it would have been much harder for the SEC to show a fiduciary-type duty.
Points all well taken.
The Harvard corporate governance blog offers some practical advice:
What does this decision mean for potential providers and recipients of material nonpublic information?
For providers—for example, companies interested in sharing information with potential investors or acquirers—the case says that if you want the recipient not to trade, you had better be specific. The safest approach, of course, is to seek a written contractual standstill from recipients. But agreements of this sort are often difficult to get parties to agree to, especially where, as in this case, the recipient would be asked to sign the agreement “blind”, without knowing the nature of the information. As a practical matter, providers may have to content themselves with a “sole use” provision, along the lines of “recipient agrees to use the information solely for the purpose of considering an investment”. Had such a provision been in place, the result in this case might well have been different.
For recipients of material nonpublic information, our advice is not to rely on this decision. The case was decided at the trial court level, is not binding on other courts, and the SEC has been given the right to file an amended complaint. Whether or not the SEC chooses to replead the case or to appeal the decision, we are certain that it will not accept the case as the final word and will continue to seek enforcement action on facts like these. Thus, while the decision will provide comfort to parties who have to defend themselves for what they have done, we would not use it as a basis for deciding what you should do. The prudent judgment continues to be that if you have agreed to keep information confidential, you should not use it as a basis for trading.
