Insider Tainting: Strategic Tipping of Material Nonpublic Information

By Verstein, Andrew | Northwestern University Law Review, January 1, 2018 | Go to article overview

Insider Tainting: Strategic Tipping of Material Nonpublic Information


Verstein, Andrew, Northwestern University Law Review


"The CEO prefaced the call by informing Cuban that he had confidential information to convey. . . . Cuban became very upset and angry during the conversation . . . . At the end of the call, Cuban told the CEO 'Well, now I'm screwed. I can't sell.""

A joke in the private fund space: The holders will know who each other are, who owns 2%. They'll say "Wise guys! Let's send this [information] over to them!"

INTRODUCTION

Across legal domains-from commodities to securities, contracts to property-we assume that everyone wants information. Yet, as Dallas Mavericks owner Mark Cuban discovered, knowledge can be a curse. American securities law prohibits trading on the basis of "inside information," such as an early tip about corporate strategy sure to presage a swing in the stock price.1 Cuban became the subject of a nine-year-long SEC insider trading enforcement action because of one such tip. He sold his stake in Mamma.com soon after the CEO told him about a confidential plan to dilute the existing shareholders by issuing new shares. The sale may have saved Cuban $750,000.2 But Cuban claimed that he had preexisting plans to sell his shares and that he did not need or want additional reasons to do so.3 The CEO's tip put Cuban in a difficult position: either cancel the planned sale or endure almost a decade of costly and risky litigation.

From the CEO's perspective, discouraging Cuban's sale was not a bad thing. After all, Cuban was the company's largest shareholder with 6.3% of the stock.4 A sale by such a major investor would have sent shock waves through the shares of the small company, frustrating the planned securities offering. Relatedly, Cuban's large stake might have been a sufficient toehold for an activist investor to agitate for change at Mamma.com. Cuban's sale of shares endangered the managers' plans and their jobs.

Thus the management of Mamma.com had several reasons to try to keep Cuban from selling shares, and the discussion of confidential stock offerings could have helped bind him in place. By tainting Cuban with inside information, the managers heaped risk into Cuban's exit path; more prudent investors would have relented and retained their shares.

The Mark Cuban case offers a glimpse into the secretive world of "insider tainting." Whereas most informational tips open doors, insider tainting closes doors. Rather than empowering and enriching the recipient, the tipper conveys information precisely in order to constrain the tippee. Tainted with inside information, the tippee faces legal risks to her preexisting or potential trading plans. By leveraging high-stakes public law to serve as a threat, insider tainting confers power over the trades of others.

It may seem surprising that tainting is possible. Criminal law is supposed to punish only the culpable, and even civil offenses in the securities world are supposed to require scienter (i.e., "intent to deceive, manipulate, or defraud"5). Moreover, familiar features of insider trading law would seem to protect innocent traders. It is usually lawful to trade on a hot tip unless you assumed a duty of trust and confidence or unless your source breaches such a duty by sharing the secret with you in order to secure a personal (often pecuniary) benefit.6 Yet the victims of insider tainting do not intend any wrongdoing, they do not promise confidentiality, and their antagonists act out of spite rather than to some kind of quid pro quo.

Nevertheless, insider tainting is viable. Some forms of insider trading are illegal even if the trader assumed no duty, conferred no benefit, and genuinely tried to avoid the tip.7 More importantly, insider trading cases are characterized by expansive law and ambiguous facts, and so there are numerous circumstances where traders may rationally fear that trading could lead to trouble even when the law is on their side. Cuban escaped liability by proving that he never promised confidentiality, but it took nine years for him to establish his version of the facts, and he may only have succeeded because the accusing CEO refused to testify against him. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Insider Tainting: Strategic Tipping of Material Nonpublic Information
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.