On Friday, the SEC filed its brief with the Fifth Circuit appealing the lower court’s dismissal of its insider trading case against Mark Cuban. The SEC outlines the primary arguments in its brief as follows:
A. Cuban’s Agreement to Keep Information Confidential Gave Rise to a Duty Not to Trade, and His Undisclosed Trading Was Therefore Deceptive, in Violation of Section 10(b) and Rule 10b-5.
1. The misappropriation theory of insider trading, as adopted by the Supreme Court, prohibits trading on the basis of material, nonpublic information in breach of a duty to the source of the information.
2. Commission Rule 10b5-2(b)(1), by its plain terms,sets forth a duty on Cuban under Section 10(b) and Rule 10b-5 not to trade because he agreed to maintain the information in confidence.
3. Commission Rule 10b5-2(b)(1) embodies a valid interpretation of the deception requirement of Section 10(b) and is entitled to Chevron deference.
a. Under Section 10(b), a duty of trust or confidence may arise by agreement.
b. An agreement to maintain information in confidence includes an agreement not to trade.
4. Even apart from Rule 10b5-2(b)(1), undisclosed trading after agreeing to keep information confidential is deceptive under Section 10(b) and Rule 10b-5.
B. In Any Event, the Complaint Adequately Alleged That Cuban’s Conduct Was Deceptive Because He Explicitly Agreed Not to Trade and Then Traded Based on the Confidential Information.
The full SEC brief in the Cuban case is available here.
