At the WSJ's law blog, Wayne State law professor Peter Henning offers up a post on the recent Cuban and Dorozhko insider trading cases.
In SEC v. Mark Cuban, a district court recently dismissed the SEC’s case against the outspoken owner of the Dallas Mavericks. The SEC had charged Cuban for selling his shares in a tech company before the public announcement of a PIPE (private investment in public equity) deal that drove down the value of his shares. Cuban, who knew about the deal, avoided losing over $750,000 by selling when he did.
But the judge in the case decided Cuban didn’t have a fiduciary duty to the tech company, even though Cuban had been given information that he promised to keep confidential prior to his selling his shares. No fiduciary duty, no insider-trading case. ...
In the Cuban case, the SEC invoked Rule 10b5-2, which defines a “duty of trust and confidence” as arising whenever “a person agrees to maintain information in confidence.” But this didn’t fly, chiefly because such a duty is not a fiduciary duty. Insider trading is not about proving someone’s untrue to his word. Rather, it is fraud based on a deception when one owes a duty to another entity not to trade on nonpublic information. Without the duty there is no fraud.
Henning's reading of the case is not supported by the plain text of the opinion.
At pages 14-15, for example, the Cuban court's opinion states that the court "rejects Cuban’s contention that liability under the misappropriation theory depends on the existence of a preexisting fiduciary or fiduciary-like relationship." Footnote 5 on page 19 likewise states that:
The court disagrees with Cuban’s assertion that, in O’Hagan, “[t]he Court [drew] a clear distinction between fiduciaries and non-fiduciaries because only a fiduciary would have a duty to make this disclosure and therefore can be said to have engaged in a ‘deception’ if he does not disclose or abstain from trading.” Although O’Hagan is written in terms of fiduciaries and fiduciary relationships, duties, and obligations, it is reasonable to infer that this is because O’Hagan was a criminal case that involved the conduct of a fiduciary. ... The Court may simply have intended that its opinion decide the case without injecting dicta to cover other circumstances in which the misappropriation theory could apply. But regardless of the reason, there is no indication in O’Hagan that such a fiduciary or fiduciary-like relationship is necessary——as opposed to merely sufficient——to impose the requisite duty, or iessential element of the misappropriation theory.
In other words, you can have liability under the misappropriation theory without having a fiduciary duty. Indeed, as the court stated at 20: "The court therefore concludes that a duty sufficient to support liability under the misappropriation theory can arise by agreement absent a preexisting fiduciary or fiduciary-like relationship." The court tossed the Cuban case not for the reasons Henning suggests, but rather because the SEC had pled the wrong kind of an agreement:
Where misappropriation theory liability is predicated on an agreement, however, a person must undertake, either expressly or implicitly, both obligations. He must agree to maintain the confidentiality of the information and not to trade on or otherwise use it.
The SEC had pled only the former, so the court tossed the case with leave to replead if the SEC believes it can show the correct agreement. In sum, I don't like it, but the Cuban opinion clearly does not stand for the proposition that "No fiduciary duty, no insider-trading case."
