The SEC won a significant victory in the Fifth Circuit Court of Appeals. The court reversed the Commission’s high profile loss (here) in its insider trading case against entrepreneur and Dallas Mavericks owner Mark Cuban. SEC v. Cuban, No. 09-10996 (5th Cir. Sept. 21, 2010). The real question, however, is whether the agency has the facts to win at trial.

The facts to the Cuban case are straightforward. In March 2004, Mr. Cuban acquired a 6.3% stake or 600,000 shares of Later that spring, the company prepared to raise capital through a PIPE offering. In June, invited Mr. Cuban to participate. The CEO of the company called Mr. Cuban. The conversation began with the CEO stating that the information he wanted to discuss had to be kept confidential. Mr. Cuban agreed and was told about the PIPE offering. After becoming upset, Mr. Cuban noted he did not like PIPE offerings because they are dilutive. He ended the call stating “Well, now I’m screwed. I can’t sell.”

Subsequently, the CEO sent Mr. Cuban an e-mail telling him how to obtain more information about the offering. Mr. Cuban called the banker conducting the deal in accord with the CEO’s e-mail. He was supplied with additional, confidential details about the offering. In response to questions, the banker told Mr. Cuban that the PIPE would be priced at a discount to market and there were other incentives for investors. One minute after the phone call ended Mr. Cuban sold his stake, avoiding a $700,000 loss.

The critical question on the defense motion to dismiss in the district court was whether there was a relationship of trust and confidence and a duty not to trade. The district court read the complaint as stating that there was an agreement to keep the information confidential, but no understanding that Mr. Cuban would not trade. Thus, selling his shares did not constitute a breach of duty according to the district court.

The circuit court disagreed with this reading. Stressing that all reasonable inferences must at this stage of the case be drawn in favor of the SEC, the court concluded that the “allegations [in the complaint], taken in their entirety, provide more than a plausible basis to find that the understanding between the CEO and Cuban was that he was not to trade . . .” It is plausible the court found that “each of the parties understood, if only implicitly” that Mr. Cuban could not trade.

The inferences drawn by the court in favor of the SEC are predicated on what the opinion describes as a “factually sparse record.” If there were more facts, the outcome might be different. For example, the court noted that “it would require additional facts that have not been put before us for us to conclude that the parties could not plausibly have reached” an agreement that Mr. Cuban could not trade. The parties also dispute’s motive in providing Mr. Cuban information, the court stated. The effect of resolving this dispute is unclear. The court also declined to consider the SEC’s argument based on Rule 10b-5-2(b)(1) which provides for a duty of trust and confidence. A footnote in the opinion notes that the validity of the rule was not considered.

Whether the SEC can develop more facts in discovery to bolster its sparse position remains to be seen. The district court offered the Commission the opportunity to amend its complaint prior to dismissal. It did not, at least suggesting that whatever facts had been obtained during the underlying investigation were in the complaint. Likewise, the Commission does not appear to have the benefit of evidence that might suggest guilt, such as efforts to cover-up or lie. To the contrary, Mr. Cuban informed the SEC about his trades and made other public statements concerning them.

There is no doubt that the SEC will have to develop more facts to replace the favorable procedural inferences it used to move past the motion to dismiss stage of this case. Whether that factual support can be developed so the agency can prevail at trial remains to be seen.