Did Mark Cuban have a duty to Mamma.com? That question will take center court as the Securities and Exchange Commission (SEC) sues Cuban, an Internet entrepreneur and owner of the Dallas Mavericks basketball team, for selling his stake in the Web company after the CEO slipped him nonpublic information about an additional stock offering. Cuban, known for his outsize personality, has come out swinging against the SEC and what he calls its "win at any cost ambitions," promising to keep the case and the murkiness of insider trading law in the public spotlight in a way not seen since Martha Stewart's sale of her ImClone shares.
While the popular perception of illegal insider trading may be clear-cut say, a pharmaceutical executive selling stock right before the FDA fails to approve a new drug the law is substantially less black and white. In 1934 Congress passed the Securities Exchange Act but didn't specifically address the topic of insider trading; it was only in the 1960s that the SEC began to bring cases under the law's antifraud statutes. Toward the end of that decade, courts codified the SEC's actions in case law, locking down the idea that everyone in the marketplace should get roughly equal access to information. (See the best and worst sports executives of 2008.)
But the initial legal theory didn't last forever. By the 1980s, the Supreme Court had ruled that equal access was too broad a policy, and that for insider trading to be illegal a person had to breach a fiduciary duty a trust that had been established between that person and the company. In one landmark case, the court overturned the conviction of a printer of financial documents who bought shares of companies he knew were takeover targets. The prosecutors, the court found, hadn't proved the man's responsibility to the firms involved in the transactions. At the same time, the court gave a nod to another interesting argument: the printer had breached his duty to his own employer since he had essentially stolen information.
The SEC has been operating under this "misappropriation theory" ever since. A key 1997 Supreme Court decision upheld the conviction of a lawyer who bought securities tied to Pillsbury while his law firm was representing a company trying to take over the baking-products outfit. The court found that using such confidential information "constitutes fraud akin to embezzlement the fraudulent appropriation to one's own use of the money or goods entrusted to one's care by another." (Read TIME's 10 Questions with Mark Cuban.)
And so the case against Cuban comes down to whether or not he had a duty that he breached to Mamma.com, its CEO and its shareholders. That potential duty, one of "trust or confidence" in legal parlance, revolves around a phone conversation Cuban had in 2004 with Mamma.com's then CEO after the executive e-mailed Cuban to call as soon as possible. When Cuban did, he found out about the company's pending financing deal that would dilute existing shareholders. He promptly got rid of his shares before the information was made public.
"Mark Cuban, the guy, is just a shareholder he has no obligation," says Jonathan Macey, a professor of securities law and deputy dean at the Yale School of Management. "The critical question is if anything happened in that phone call that gave rise to a promise." Under an SEC rule adopted in 2000, if Cuban agreed to keep the information confidential, then he had a "duty of trust or confidence."
What was actually said during the conversation is a point of contention. The SEC holds that Cuban was made aware of the sensitive nature of what was about to be told to him; that he understood he would have to keep it confidential; and that he still agreed to hear it. But the day after charges were filed, Cuban's attorney posted an entry on Cuban's blog bluntly saying, "There was no agreement to keep information confidential." The post also included a partial transcript of an exchange between Mamma.com's former CEO and Cuban's lawyer in which the ex-CEO said he didn't remember Cuban agreeing to confidentiality. That account is completely at odds with the conversations and e-mails presented in the SEC complaint, including a version of the phone call that ended with Cuban saying, "Well, now I'm screwed. I can't sell."
The Cuban case is, in effect, a high-stakes game of he saidshe said. But even if the SEC's version of events holds up in court, there is still a chance that the case could keep going. Stephen Bainbridge, a law professor at UCLA who has followed insider trading law for two decades and written a book on the topic, points out that the case law around whether or not a contract of confidentiality suffices for illegal insider trading "is not as clear as one would like." Some court findings, he says, suggest that it's not enough for two parties to merely agree to keep information confidential they must also have a higher-level relationship, like that of a lawyer and client or a company and employee.
The SEC has brought charges against Cuban under a particular legal theory but the legal theories around illegal insider trading have a long history of getting rewritten in the courts. "He's an interesting guy for them to have picked. He's not going to roll over and play dead," says Bainbridge. "If he wants to, he has the resources to take this case all the way up to the Supreme Court." If it comes to that, the case could take on real significance.
With reporting by Laura Fitzpatrick