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Aug. 12, 2009

Securities Enforcement Alert: Texas District Court Dismisses Insider Trading Charges Against Mark Cuban and Holds That Misappropriation Theory Requires Duty Not to Trade

In a significant defeat for the Securities and Exchange Commission, a federal court in Texas has dismissed the high-profile insider-trading charges that the SEC had brought against well-known entrepreneur Mark Cuban. In a 35-page opinion, the Court set forth a comprehensive analysis of the so-called “misappropriation theory” of insider trading. The ruling, if adopted by other courts, would limit the reach of the misappropriation theory by requiring the SEC to prove that an individual who has traded on non-public, material information have had an independent, pre-existing duty to the source of the information not to trade on that information. Under the decision, it is not enough that the trading party simply agreed to keep the information confidential. This view may cause issuers, prior to disclosing material, non-public information to potential, non-fiduciary investors or similarly situated parties, to seek an agreement not to trade on or otherwise use the information -- in addition to the standard confidentiality agreement -- if they wish to preclude pre-announcement transactions in their shares by the recipients of the information.

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