The SEC appealed from the decision dismissing its insider trading case against Mark Cuban. SEC v. Cuban, No. 08-2050 (N.D. Tex. July 17, 2009). Previously, the Commission rejected an opportunity to amend its complaint.

The decision to appeal Cuban is emblematic of the aggressive posture the SEC has consistently taken in insider trading cases. This is particularly true here, where the factual record is thin at best. The case centered on the trading by Mr. Cuban in advance of the announcement of a PIPE offering to avoid a loss. Specifically, Mr. Cuban sold his stake in after being told about the offering by company officials who, in the first conversation with him conditioned the discussions on his acknowledgement that the information would be maintained in confidence. While Mr. Cuban stated at one point that he could not trade after learning about the proposed offering, shortly after his second conversation about it with the company, he sold his entire stake, avoiding a loss he expected.

In dismissing the complaint against Mr. Cuban, the court rejected his position that insider trading had to be predicated on a breach of fiduciary duty. Rather, the court held that the violation could be predicated on a breach of an express obligation not to use the information to trade as discussed here.

The Commission’s appeal will have to be based on the single statement of Mr. Cuban at the beginning of his initial conversation with the company. The SEC clearly will not challenge the conclusion that a breach of fiduciary duty is not necessary for insider trading liability. Indeed, that is the position which helped the SEC win a reversal in SEC v. Dorozhko, Case No. 08-0201, 2009 U.S. App. LEXIS 16057 (2nd Cir. July 222, 2009), discussed here.

Rather, the SEC’s appeal will have to be based almost exclusively on Mr. Cuban’s acknowledgement that he would keep the information about to be conveyed confidential. Yet, in making that statement there is no indication that Mr. Cuban knew the nature of the undertaking being sought beyond a vague statement about confidentiality. As the district court concluded, this statement offers scant support for undertaking the type of obligation on which insider trading is typically based.

Similarly, the acknowledgement by Mr. Cuban that he could not trade appears to offer little support for the Commission’s case. Viewed in context, it is clear that the statement was made while expressing anger about an offering which Mr. Cuban viewed as harmful to existing shareholders.

Overall the decision to appeal Cuban clearly demonstrates the Commission’s willingness to push the edge of insider trading. Indeed, the thin factual record suggests that the SEC is pushing the edge of the required legal obligation toward a parity of information standard. That theory, of course, has long been rejected as a basis for insider trading liability.