Business Associations Keyed to Hamilton
Securities and Exchange Commission v. Cuban
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Cuban (Defendant), the largest shareholder of Mamma.com, Inc., with a 6.3 percent interest, was contacted and informed by the CEO of Mamma.com that the company was planning to raise capital through a private investment in public equity (PIPE) offering. Prior to revealing this information to Cuban (Defendant), the CEO informed Defendant that the CEO was about to disclose confidential information, and Defendant agreed that he would keep confidential any information the CEO planned to share with him. The CEO, in reliance on Defendant’s agreement to keep the information confidential, proceeded to tell Defendant about the PIPE offering. At the conclusion of the call Defendant said: “Well, now I’m screwed. I can’t sell.” Immediately after receiving more nonpubic information from the investment bank handling the transaction, Defendant sold all of his Mamma.com stock. Defendant did not inform Mamma.com of his intention to trade on the information that he had been given. The following day, after the markets had closed, Mamma.com public announced the PIPE offering. Trading in the company’s stock opened substantially lower the next day and continued to drop in the days that followed. Defendant avoided losses surpassing $750,000 by selling his shares prior to the pubic announcement of the PIPE. Following the sale, Defendant filed the required disclosure statement with the SEC and “publicly stated that he had sold his Mamma.com shares because the company was conducting a PIPE[.]” Based on these events, the SEC (Plaintiff) brought suit against Defendant under the misappropriation theory of insider trading, claiming violations of § 17(a) of the Securities Act of 1933 (Securities Act), and promulgation of Rule 10b-5. Defendant moved to dismiss, asserting that, in order to establish liability for insider trading, the SEC (Plaintiff) had to demonstrate that his conduct was deceptive under § 10(b), which he claimed the SEC (Plaintiff) had not done. Specifically, he argued that the Plaintiff had alleged only that he entered into a confidentiality agreement, which is in itself not sufficient to establish misappropriation theory liability because the agreement must arise in the context of a pre-existing fiduciary or fiduciary-like relationship, or create a relationship that bears all the hallmarks of a traditional fiduciary relationship. Also, he argued that the existence of a fiduciary or fiduciary-like relationship is governed exclusively by state law, under which the facts pleaded did not demonstrate that he had such a relationship with Mamma.com, and that even under federal common law, the facts pleaded still did not show such a relationship. Finally, he argued that the Plaintiff could not rely on Rule 10b5-2(b)(1) to supply the required duty because the Rule applies only in the context of family or personal relationships, and, if the Rule does create liability in the absence of a preexisting fiduciary or fiduciary-like relationship, it surpasses the SEC’s § 10(b) rulemaking authority and could not be applied against him.
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