Corporate Governance

SEC v. Cuban: Case Dismissed (The Analysis)

By J. Robert Brown

The trial judge dismissed the Cuban case because the confidentiality agreement alleged to have been executed by Cuban did not inclue a ban on trading.

There are several problems with the analysis.  Despite the prodigious effort by the court to separate the concept of confidentiality and use, the two are not so clearly separated.  First, the purpose of confidentiality agreements is typically and inherently an attempt to prevent use.  Second, confidential information can easily be revealed through use.  Third, the interconnected nature of the concepts means that parties using the concept of confidentiality can easily have meant it as a synonym for use.  In other words, it is a matter of the intent of the parties. 

That the concept can encompass both can be seen by the language in Regulation FD, 17 CFR 243.100(b)(2).  Regulation FD prohibits intentional selective disclosure.  The regulation, however, exempts disclosure if made "To a person who expressly agrees to maintain the disclosed information in confidence;"  The use of the term "confidence" in Regulation FD means that the recipient will not use the information to trade.  In other words, the concept of confidentiality encompasses use.

What will happen next?  Most likely, the SEC will file an amended complaint and allege that the parties intended the confidentiality agreement to encompass use.  To the extent the case remains good law, officers who disclose confidential information to shareholders will have to ask that it be kept confidential and not be used to trade.  In other words, the case will have limited impact.  Regulation FD may need to be amended.

Nonetheless, it shows the problems with the development of the law of insider trading.  The reality is that insider trading does not always encompass material non-public information deliberately passed along by corporate officers to someone they know will trade.  To ordinary investors, this looks terribly unfair and suggests that the trading markets are not open but fixed.

Full post as published by The Race to the Bottom on July 17, 2009 (boomark / email).