You may recall that last year a federal district court in Texas dismissed the SEC's insider trading case against Mark Cuban, on the theory that a simple confidentiality agreement without an agreement not to trade did not create the basis for a Rule 10b-5 enforcement action. Our memo at the time cautioned against undue reliance on that decision pending further developments, including the SEC's appeal. That appeal was decided today by the Fifth Circuit, which reversed the lower court decision.
The big picture question at issue here is what kind of relationship is necessary to support a violation of Rule 10b-5: is the "duty of trust and confidence" required by Supreme Court precedents limited to fiduciary-like relationships and express agreements not to trade or, as the SEC asserts, does it apply wherever there is a confidentiality agreement? The Fifth Circuit, however, decided to reserve the big picture for another day. Applying a de novo review standard, the appeals court ruled that the SEC's original complaint could be read to allege that Mr. Cuban had in fact orally agreed not to trade. The case was thus remanded to the district court for further proceedings including discovery.
Our advice continues to be that:
- if you want a recipient of confidential information to refrain from trading, get an express agreement not to trade or, if that is impracticable, at least seek a "sole use" limitation on the use of the information; and
- if you've received information that you've agreed to keep confidential, don't assume you can trade on it just because the confidentiality agreement doesn't literally prevent you from doing so.
See the Fifth Circuit decision here.