## Facts

- Mark Cuban was the largest minority shareholder of Mamma.com Inc., holding about 6.3% of its shares.
- Mamma.com’s CEO contacted Cuban about an upcoming PIPE (private investment in public equity) offering and indicated he would share confidential information.
- Cuban agreed to keep the information confidential; the SEC alleged Cuban reacted in substance that he could not sell after learning of the planned offering.
- After receiving additional nonpublic information relating to the transaction, Cuban sold all his Mamma.com shares before the PIPE was publicly announced.
- Following the public announcement, Mamma.com’s stock price dropped, and the SEC alleged Cuban avoided losses exceeding $750,000 by selling earlier.
- Cuban made a required securities filing and publicly stated he sold because the company was conducting a PIPE.
- The SEC sued under § 17(a) of the Securities Act of 1933, § 10(b) of the Exchange Act of 1934, and Rule 10b-5, alleging insider trading under the misappropriation theory based on Cuban’s alleged agreement of trust and confidence with Mamma.com and its CEO.

## Issues

1. Whether an agreement to keep material nonpublic information confidential, without an agreement not to trade, creates a duty whose breach can support misappropriation-theory insider trading liability.
2. Whether the complaint plausibly alleged that Cuban undertook a duty both to maintain confidentiality and to refrain from trading, such that trading without disclosure was “deceptive” under § 10(b) and Rule 10b-5.

## Decision

- The court granted Cuban’s Rule 12(b)(6) motion to dismiss for failure to state a claim.
- The court held the complaint did not plausibly allege a duty of non-use (a duty not to trade) arising from Cuban’s confidentiality agreement.
- The court concluded that, without a duty of non-use or another fiduciary or fiduciary-like duty, the alleged trading did not constitute a deceptive breach required for misappropriation liability under § 10(b) and Rule 10b-5.
- The SEC was given leave to amend within 30 days.

## Legal Principles

- Misappropriation-theory insider trading requires trading on confidential information in breach of a fiduciary or similar relationship of trust and confidence owed to the information’s source, and the breach must be deceptive for § 10(b) and Rule 10b-5 purposes.
- A promise to keep information confidential does not, by itself, establish a duty not to trade on that information; confidentiality and non-use are distinct obligations.
- At the pleading stage, a complaint must plausibly allege the source-duty relationship and the specific duty allegedly breached (including any non-trading obligation) to state a misappropriation-based § 10(b)/Rule 10b-5 claim.

## Conclusion

The court dismissed the SEC’s misappropriation-theory insider-trading complaint because the alleged confidentiality agreement did not plausibly include a non-trading obligation, and the complaint therefore failed to plead a deceptive breach of a duty sufficient to support liability under § 10(b) and Rule 10b-5.


S.E.C. v. Cuban, 634 F. Supp. 2d 713 (N.D. Tex. 2009)