A Heart as Far from Fraud as Heaven from Earth: Sec V. Cuban and Fiduciary Duties under Rule 10b5-2
Pahl, Joseph, Northwestern University Law Review
ABSTRACT-In 2008, the SEC indicted Dallas Mavericks owner and media mogul Mark Cuban for insider trading based exclusively on information obtained while under an oral confidentiality agreement. The government argued that this agreement was sufficient to establish the necessary duty required under the misappropriation theory based on SEC Rule 10b5- 2(b)(1) passed in 2000. This Note argues that a confidentiality agreement is insufficient for establishing the requisite fiduciary or fiduciary-like relationship under the misappropriation theory. Further, this Note argues that the SEC's attempt to circumvent the requirement for a fiduciary or fiduciary-like relationship by promulgating Rule 10b5-2(b)(1) overreaches the power given to the SEC under the Securities Exchange Act.
Controversy follows Mark Cuban, the 171st richest person in America,1 through many of his endeavors. Since his $280 million purchase of the 2011 NBA Champion Dallas Mavericks in 2000,2 Cuban has been one of the most divisive figures in the NBA.3 Over the course of his time as owner, Cuban has amassed well over one million dollars in fines for his brash behavior.4 Cuban's television network, HDNet, has been at the forefront of contentious programming, most recently for teaming up with Joe Francis's Girls Gone Wild for a risqué reality television show.5 Cuban drew criticism from the political arena as a producer of the movie Redacted,6 drawing a scathing letter from Congressman Duncan Hunter, Chairman of the House Armed Services Committee, who called the film's portrayal of American troops shameful.7 Cuban is no stranger to the courtroom, bringing high-profile lawsuits against Zuffa LLC in 20088 and the United Football League in 2011,9 and finding himself as a defendant against Ross Perot Jr. in a suit alleging that the Mavericks were being mismanaged by Cuban and his team.10
And in 2008, Cuban had a run-in with the Securities and Exchange Commission (SEC), which claimed that he had committed insider trading in violation of § 10(b) of the Securities Exchange Act11 (the Exchange Act) and SEC Rule 10b-512 in 2004, when he sold his 6.3% stake in the Internet search engine company Mamma.com.13 The SEC based its claim on Cuban's decision to trade shares after having made an oral agreement with the company's CEO to maintain confidentiality regarding an upcoming securities issuance.14 While Cuban's choice to agree to confidentiality and to subsequently trade may have been distasteful, this Note argues that his behavior was not actually illegal.
From the original codification of insider trading law in § 10(b) and Rule 10b-5 to the development of the classical theory of insider trading in the early 1980s15 and the misappropriation theory in the late 1990s,16 two things have remained constant in analyzing liability. First, under § 10(b), the statute requires a "manipulative or deceptive device" to be used in "connection with the purchase or sale of any security" to give rise to liability.17 The SEC is limited in its statutory rulemaking authority by the language of the statute itself and therefore cannot create rules for the enforcement of § 10(b) that reach beyond the requirements for either "manipulative or deceptive" behavior.18 Second, case law regarding both the classical and misappropriation theories of insider trading mandates that, in the case of deception or manipulation caused by lack of appropriate disclosure in the context of a duty to disclose or abstain from trading, a fiduciary or fiduciary-like relationship gives rise to such a duty.19
Because the SEC has focused increasingly on insider trading,20 clarifying when such a duty to disclose or abstain exists has become an increasingly important issue for investor certainty.21 Three basic questions arise out of SEC v. Cuban: (1) Is existing case law sufficient to find that a confidentiality agreement on its own is enough to establish the requisite relationship for § 10(b) liability? …