Reining in Maverick Traders: Rule 10b5-2 and Confidentiality Agreements*
2009; Texas Law Review Association; Volume: 88; Issue: 1 Linguagem: Inglês
ISSN
1942-857X
Autores Tópico(s)Securities Regulation and Market Practices
ResumoI. Introduction In 1997, the Supreme Court substantially expanded the Securities and Exchange Commission's ability to prosecute insider trading by recognizing the misappropriation theory in United States v. O 'Hagan.1 While the classical theory recognized prior to O 'Hagan only prohibited insider trading by corporate directors or fiduciaries, the misappropriation theory extended insider trading liability to corporate outsiders.2 More specifically, a person may be prosecuted under the misappropriation theory when misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information.3 While O 'Hagan fundamentally altered the landscape of insider trading liability, it left a number of significant questions unanswered, leaving the lower courts to fill in the gaps. One of these unresolved issues stems from the requirement that a person must breach some duty to the source of confidential information in order to be liable under the misappropriation theory. While virtually every court has recognized that a classic fiduciary relationship can give rise to a duty not to misappropriate confidential information,4 lower courts have reached inconsistent conclusions with regard to extending misappropriation liability beyond traditional hornbook fiduciary relationships.5 Because of the lack of clarity on this duty question, the SEC promulgated Rule 10b5-2.6 Passed in August 2000, Rule 10b5-2 attempts to establish a bright-line rule courts may use to determine whether the requisite fiduciary duty exists.7 Since passing Rule 10b5-2, the SEC has begun to bring cases to test the limits of the rule.8 Consistent with this strategy, the SEC filed a particularly high-profile civil insider trading case on November 17, 2008, against billionaire Dallas Mavericks owner Mark Cuban.9 According to the complaint, Cuban was contacted by the CEO of Mamma.com, a publicly traded company in which Cuban owned 600,000 shares, about participating in the company's private investment in public equity offering (more commonly known as a PIPE).10 The SEC alleged that the CEO sought and obtained Cuban's agreement to keep the PIPE offering confidential before providing Cuban with further details about the offering.11 Despite his alleged agreement to keep the PIPE offering confidential, Cuban instructed his broker to sell his Mamma.com shares the same day he learned about the offering.12 By selling his shares before the PIPE offering was announced, Cuban was able to avoid losses of more than $750,000. 13 While the SEC contended that these facts were sufficient to sustain insider trading charges, Cuban disagreed, arguing that he had no duty, fiduciary or otherwise, to Mamma.com or its CEO, regardless of whether he agreed to keep the PIPE offering confidential.14 This dispute between Cuban and the SEC exemplifies an important question that has not been addressed by the Supreme Court or any of the courts of appeals: Is a confidentiality agreement alone sufficient to create a duty, the breach of which establishes insider trading liability under the misappropriation theory? In this Note, I address that question, as well as the related issue of whether the SECs Rule 10b5-2 is valid. In Part II, I briefly discuss the development of the misappropriation theory of insider trading, including the fiduciary duty requirement that has come to be associated with the theory. In Part III, I examine the SECs proposal and adoption of Rule 10b5-2. In Part IV, I analyze the SECs application of Rule 10b5-2 to cases, like SEC v. Cuban, in which courts grapple with the question of whether an agreement to keep information confidential is sufficient to establish a duty to abstain from trading on that information. After reviewing existing case law on the issue, I argue that a confidentiality agreement is insufficient to establish a duty that could give rise to liability for insider trading, and that Rule 10b5-2, to the extent that it is inconsistent with that proposition, is invalid. …
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