## Facts

- Mark Cuban held roughly 600,000 shares (about 6.3%) of Mamma.com Inc., making him its largest known shareholder.
- Mamma.com planned a private investment in public equity (PIPE) financing expected to be priced at a discount and dilutive to existing shares.
- The CEO contacted Cuban, stated he had confidential information, and Cuban allegedly agreed to keep the information confidential.
- After learning of the PIPE plan, Cuban allegedly said, “Well, now I’m screwed. I can’t sell,” and then spoke with the investment bank to obtain additional details.
- Shortly after these communications, Cuban sold his entire Mamma.com position before the PIPE was publicly announced.
- After the PIPE announcement, Mamma.com’s stock price dropped; the SEC alleged Cuban avoided losses exceeding $750,000 by selling beforehand.
- The SEC filed a civil enforcement action alleging violations of Securities Act § 17(a), Exchange Act § 10(b), and Rule 10b-5 under the misappropriation theory.
- The district court dismissed for failure to state a claim, concluding the complaint alleged only a confidentiality promise, not an agreement not to trade.
- The Fifth Circuit reversed and remanded, holding the complaint plausibly alleged a duty that included non-trading.
- After remand, the case proceeded to trial; a jury ultimately found Cuban not liable.

## Issues

1. Whether a complaint states a misappropriation-theory insider trading claim when it alleges an agreement to keep material nonpublic information confidential and alleges facts supporting a non-trading obligation.
2. Whether undisclosed trading can be “deceptive” under § 10(b) and Rule 10b-5 when the trader allegedly undertook a duty to the information source that included refraining from trading.
3. Whether, at the pleading stage, the SEC adequately alleged a relationship of trust or confidence sufficient to support misappropriation liability, including in light of Rule 10b5-2(b)(1).

## Decision

- The Fifth Circuit reversed the district court’s Rule 12(b)(6) dismissal and remanded for further proceedings.
- The court held that, taking the allegations as true and drawing reasonable inferences for the SEC, the complaint plausibly alleged Cuban agreed both to keep the PIPE information confidential and that he could not trade on it.
- The court concluded that, if proven, Cuban’s undisclosed sale after undertaking such obligations could constitute deceptive conduct under the misappropriation theory.
- The court did not determine liability; it held only that the SEC’s claims should proceed beyond the pleading stage.

## Legal Principles

- Misappropriation-theory liability under § 10(b) and Rule 10b-5 rests on deceptive use of material nonpublic information in breach of a duty owed to the information’s source, typically framed as a duty to disclose to the source or abstain from trading.
- A bare promise of confidentiality, standing alone, may be insufficient if it does not include (expressly or by plausible inference from the alleged agreement) a commitment not to trade on the information for personal benefit.
- At the motion-to-dismiss stage, courts must accept well-pleaded factual allegations as true and draw reasonable inferences in the plaintiff’s favor; dismissal is improper where the alleged agreement plausibly included a non-trading undertaking.
- Rule 10b5-2(b)(1) may inform whether pleaded facts describe a relationship of trust or confidence for misappropriation purposes, particularly when combined with specific allegations about the parties’ understanding.

## Conclusion

The Fifth Circuit held the SEC adequately pleaded a misappropriation-theory insider trading claim by alleging Cuban agreed to keep PIPE information confidential and acknowledged he could not trade on it, making his undisclosed sale plausibly deceptive under § 10(b), Rule 10b-5, and § 17(a); the case proceeded, but a jury later found Cuban not liable.


S.E.C. v. Cuban, 620 F.3d 551 (5th Cir. 2010)