12/08/2009 02:43:24 PM EST
Professor James L. Carey on Confidentiality and SEC v. Cuban
If a client gives out material, non-public information about his company without first obtaining assurances that the recipient cannot trade in securities using that information, that client may be in breach of his duties to the company. SEC v. Cuban, 634 F. Supp. 2d 713 (N.D. Tex. 2009) raises the very real possibility that a client’s current confidentially agreements are not sufficient to protect against this problem. In this Analysis, Professor James L. Carey discusses updating confidentiality and nondisclosure agreements in light of SEC v. Cuban. He writes:
Outside of investment circles (and sometimes even within investment circles), very little thought may be given to how . . . confidentiality agreements protect your company from problems with the given information being used for securities trading. Historically, there has been very little need to be concerned about this issue. This was principally because the Securities and Exchange Commission ("SEC") had taken the position that trading in securities in violation of a duty of trust or confidence would be considered insider trading (Securities Act Rule 10b5-2). A promise to keep information confidential was considered sufficient to make a person an insider for trading purposes. . . .
However, a federal District Court ruling has called this position into serious question. The United States District Court Northern District of Texas, in SEC v. Mark Cuban (634 F. Supp. 2d 713), has ruled that a duty of confidence, by itself, is NOT sufficient to safeguard against a recipient of information using that information to engage in insider trading. The court dismissed an action against businessman and Dallas Mavericks owner Mark Cuban despite the accepted fact that Mr. Cuban had entered into a binding confidentiality agreement. It should be noted that Mr. Cuban disputes the existence of the confidentiality agreement, but for purposes of the motion to dismiss the case, the existence of a confidentially agreement was accepted as fact.
The court held that for a person to be liable for insider trading, that person must be bound by more than simply a promise of confidentiality. A relationship of trust and confidence necessary to preclude someone from trading on the basis of the material, nonpublic information is not created by a mere confidentially agreement. The court specifically stated that the agreement "must consist of more than [a] promise merely to keep information confidential" to make the recipient an insider for trading purposes. Mr. Cuban's agreement was alleged to have been ONLY an agreement to keep information confidential, so the court dismissed the SEC's case against him.