Mark Cuban defense verdict highlights difficulty of proving “misappropriation” theory of insider trading

Abstract

Purpose

To summarize and draw conclusions from the insider trading suit brought against well-known entrepreneur Mark Cuban in 2008.

Design/methodology/approach

Summarizes the facts of the 2008 case, brought by the SEC against Cuban for allegedly misappropriating material, non-public information conveyed to him purportedly pursuant to a confidentiality agreement. Reviews the basics of the misappropriation theory of insider trading, and the basis of the jury verdict in Cuban's favor. Concludes by stressing that securities analysis and major investors should still remain cautious, and explains why.

Findings

The Cuban verdict appears, at first glance, to be a substantial victory for securities analysts and major investors whose businesses depend on regular communications with corporate insiders or others who possess material non-public information. It demonstrates the challenges the SEC faces under existing law in establishing a relationship of trust and confidence between the recipient of alleged material, non-public information and the source of that information for purposes of proving misappropriation liability. Nevertheless, the Cuban judgment did not ultimately turn on the existence of such a relationship, and the contours of misappropriation liability remain unsettled. Accordingly, securities analysts, investors and any other entity or individual who receives information pursuant to a confidentiality agreement should remain cautious and refrain from acting on material, non-public information regardless of the circumstances.

Originality/value

Practical explanation by experienced litigators.

Citation

Green, J. and Miner, A. (2014), "Mark Cuban defense verdict highlights difficulty of proving “misappropriation” theory of insider trading", Journal of Investment Compliance, Vol. 15 No. 1, pp. 38-40. https://doi.org/10.1108/JOIC-02-2014-0012