Canada: Insider Trading And Confidentiality Agreements Following The U.S. District Court’s Decision In SEC v. Cuban

On July 17, the U.S. District Court for the Northern District of Texas (the Court) dismissed insider trading charges brought against Mark Cuban by the U.S. Securities and Exchange Commission (SEC).1 The SEC alleged that Mr. Cuban was liable under the "misappropriation theory" of liability for securities trading in breach of a duty created by his oral agreement to keep confidential certain information provided by the CEO of Inc. (the Company), a publicly-traded company in which Mr. Cuban was a shareholder. In a case of first impression, the Court rejected the SEC's long-held view, embedded in Rule 10b5-2 and Regulation FD2, that such a duty exists whenever a person agrees to maintain information in confidence. Instead, the Court ruled that a breach of a legal duty arising by agreement can only be the basis for misappropriation theory liability if it is predicated on a person's agreement, either expressed or implied, to maintain the confidentiality of the information and to refrain from trading on or otherwise using the information for personal benefit.


According to the SEC complaint, on June 28, 2004 the CEO of the Company contacted Mr. Cuban, the Company's largest stockholder, to inform him of an impending private investment in public equity (PIPE) offering, and to ask Mr. Cuban if he would like to participate. The CEO prefaced the phone call by informing Mr. Cuban that he had confidential information to convey, and Mr. Cuban agreed that he would keep the information confidential.

Mr. Cuban was displeased with the planned offering, expressing concerns that it would dilute existing shareholders. Without informing the Company that he intended to trade on the information that he had agreed to keep confidential, Mr. Cuban sold his entire 6.3% stake in the Company on June 29, 2004. After the markets closed on June 29, 2004 the Company publicly announced the PIPE offering and, as a result of that news, the share price declined over the next several days. By selling his shares prior to the public announcement of the offering, Mr. Cuban was able to avoid losses in excess of US$750,000.

The Court's Decision

Under the "misappropriation theory" of insider trading liability, a person commits fraud "in connection with" a securities transaction, and therefore violates Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5, when that person misappropriates confidential information for securities trading purposes in breach of a duty owed to the source of the information.3

In dismissing the insider trading charges against Mr. Cuban, the Court held that such a duty (under the misappropriation theory) can arise by agreement where a pre-existing fiduciary or fiduciary-like relationship is absent. The agreement, however, must consist of more than an express or implied promise merely to keep the information confidential. It must also impose on the party who receives the information a legal duty to refrain from trading on (or otherwise using) the information for personal gain. In the opinion of the Court, without both requisite elements, misappropriation theory liability cannot attach. The Court also held that it was beyond the SEC's rulemaking authority to impose liability where both such elements were absent. Specifically, the Court held that the SEC could not rely on Rule 10b5-2(b)(1) to establish misappropriation theory liability because the express terms of the Rule refer only to an undertaking to maintain confidentiality, and do not require an undertaking not to trade on or otherwise use the information for personal benefit. Rule 10b5-2(b)(1) states that the applicable duty arises "[w]henever a person agrees to maintain information in confidence."

In sum, because the SEC failed to allege that Mr. Cuban undertook a duty, either expressly or implicitly, to refrain from trading on the information, the Court held that he could not be liable under the misappropriation theory of insider trading.

Practice Points

In considering the implications of this decision, it should be noted that the decision is not binding outside the Northern District of Texas, and that the decision may ultimately be subject to review by the U.S. Court of Appeals. Nevertheless, the following practice points are worthy of consideration:

  • Publicly-traded companies engaged in confidential discussions with third parties should obtain agreements, preferably in writing, that address both of the requisite elements of the misappropriation theory of insider trading liability articulated by the Court: an agreement (i) not to disclose the confidential information and (ii) to refrain from trading in the company's securities.
  • Existing agreements governing the provision of confidential information may need to be revised to include an express undertaking not to trade on or otherwise use such information for personal benefit.
  • Customary practices among participants in PIPE offerings and other private placements of securities by publicly-traded companies governing the provision of confidential information may need to be revised. In the past, issuers have often relied on statements in offering materials that such information is being provided for the "sole purpose" of evaluating a possible investment in the securities offered for sale. Under the Court's ruling, however, a mere unilateral expectation on the part of the information source cannot create the predicate duty for misappropriation theory liability outside a fiduciary or fiduciary-like relationship.

To address this concern, absent a formal written agreement with the information recipient, issuers may wish to modify their offering materials to state in bold type that the recipient and its representatives shall be deemed to have represented that they will maintain the confidentiality of the information and will refrain from trading in the company's securities on the basis of any information contained in the offering materials.

Until it becomes clear that the views expressed by the Court have been accepted by the U.S. appellate courts and the SEC, we recommend that recipients of material, nonpublic information continue to refrain from trading on the basis of such information where one has agreed to keep the information confidential or otherwise has a duty to do so.


1. The court's decision can be found at

2. See SEC Regulation FD Compliance and Disclosure Interpretations, Question 10 which states:

Q: If an issuer gets an agreement to maintain material nonpublic information in confidence, must it also get the additional statement that the recipient agrees not to trade on the information in order to rely on the exclusion in Rule 100(b)(2)(ii) of Regulation FD?
A: No. An express agreement to maintain the information in confidence is sufficient. If a recipient of material nonpublic information subject to such a confidentiality agreement trades or advises other to trade, he or she could face insider trading liability.

3. See United States v. O'Hagan, 521 U.S. 642 (1997). This theory of insider trading is distinct from the "traditional" or "classical" theory of insider trading liability which is premised on a relationship of trust and confidence between shareholders of a corporation and those insiders – directors, officers and controlling shareholders – who obtain confidential information by reason of their position with the corporation. The classical theory of insider trading liability was adopted by the U.S. Supreme Court in Chiarella v. United States, 445 U.S. 222 (1980).

Kevin Cramer is a partner in the Business Law Department of the firm's New York office where he practices U.S. M&A and securities law. James Lurie is a partner in the Business Law Department of the firm's New York office. Marc Kushner is a partner in the Corporate Practice Group of the firm's New York office.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.