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
Related Topics
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions