I've now had a chance to read the Fifth Circuit's opinion in SEC v. Cuban, which reinstated the insider trading charges against Cuban. (See earlier post.) Here's the money quote:
While O’Hagan did not set the contours of a relationship of “trust and confidence” giving rise to the duty to disclose or abstain and misappropriation liability, we are tasked to determine whether Cuban had such a relationship with Mamma.com. The SEC seeks to rely on Rule 10b5-2(b)(1), which states that a person has “a duty of trust and confidence” for purposes of misappropriation liability when that person “agrees to maintain information in confidence.”24 In dismissing the case, the district court read the complaint to allege that Cuban agreed not to disclose any confidential information but did not agree not to trade, that such a confidentiality agreement was insufficient to create a duty to disclose or abstain from trading under the misappropriation theory, and that the SEC overstepped its authority under section 10(b) in issuing Rule 10b5-2(b)(1). We differ from the district court in reading the complaint and need not reach the latter issues.
So the court is not resolving the difficult legal issues posed by the Cuban case, which we have explored many times before (go to the insider trading archive and scroll down). Instead, they start by reading the "complaint in the light most favorable to the SEC" and then concluding that the complaint's "allegations, taken in their entirety, provide more than a plausible basis to find that the understanding between the CEO and Cuban was that he was not to trade, that it was more than a simple confidentiality agreement."
I find this rather curious. If the law is, as I believe it to be, that a mere agreement not to trade is an insufficient basis for imposing insider trading liability, then shouldn't the question of what Cuban did or did not do in that regard be irrelevant?
Here is what I take to be the court's answer to that question:
Given the paucity of jurisprudence on the question of what constitutes a relationship of “trust and confidence” and the inherently fact-bound nature of determining whether such a duty exists, we decline to first determine or place our thumb on the scale in the district court’s determination of its presence or to now draw the contours of any liability that it might bring, including the force of Rule 10b5-2(b)(1). [In an accompanying footnote, the court also stated that: "Nor must we reach the validity of Rule 10b5-2(b)(1)."]
I think the court's putting the cart before the horse. The question of whether you need a fiduciary duty or a mere contractual agreement or even an agreement that doesn;t rise to the level of a legally binding contract is a question of law not of fact. It's not "inherently fact-bound." It's a matter of reading the relevant Supreme Court precedents and deciding whether to follow them or not.
We only get into "inherently fact-bound" questions after we resolve the initial question of law. And the relevant facts depend on how you resolve the legal issues.
If, for example, you decide that a fiduciary duty between Cuban and Mamma was required, you have to focus on facts relevant to whether a fiduciary duty existed and, if so, whether it was breached by Cuban. If you decide a contractual duty of confidentiality is required, you'll focus on a different set of issues, including those relating to formation of a contract. If you decide that a mere agreement is enough, you'll focus on a subset of the contractual facts; namely, what did Cuban agree to do.
That's why the cart's before the horse.
My guess is that the 5th Circuit just wants to duck the complex legal issues and is hoping the case goes away. My hope is that Cuban will fight it all the way to the Supreme Court.
In the interests of full disclosure, you should know that I am one of group of law professors who filed amicus briefs in support of Cuban's legal position at both the trial court and appellate levels. I am not part of the Cuban defense team nor have I communicated with them in writing this post.
