Insider Trading: Three Cases

1. SEC v. Mark Cuban

On Friday, July 17, 2009, Judge Sidney Fitzwater, of the US District Court, Northern District, Texas, in Dallas, ruled in Favor of Mark Cuban, dismissing a lawsuit that the SEC had brought against him. Fitzwater found that the SEC had failed to state a claim on which relief could be grantred.

It did so without prejudice, i.e. the SEC may replead.

The case involved Cuban's knowledge of a forthcoming PIPE -- a private investment in public equity. When all other things are equal, a PIPE will cause a reduction in a stock's price, simply because it increases the supply of that company's stock in the marketplace. Without some corresponding increase in the demand for it, the price should fall.

Cuban was an investor in the company in question but he was not an "insider" to it in the strictest sense -- he was not a board member, officer, etc. On the SEC's theory, he was a fiduciary, and the insider trading was thus a breach of a fiduciary responsibility, i.e. his agreement to keep confidential the information that an issuer's CEO provided to him about a forthcoming PIPE.

But the agreement to keep the information confidential that the SEC alleges does not amount, the court said, to an agreement to refrain from a sale of stock. A sale may hint, to those who learn of it, that the seller has just received some information, but it is hardly a clearcut case of communication. "The complaint asserts no facts that reasonably suggest that the CEO intended to obtaion from Cuban an agreement to refrain from trading on the information as opposed to an agreement merely to keep it confidential," the court said.

2. US v. Ralph Cioffi

Cioffi, who is a criminal defendant in the case arising from the failure of two Bear stearns affiliated hedge funds in 2007, has not been so fortunate as Cuban. His trial judge has rejected his motion to dismiss.

In New York, on Tuesday, July 14, Judge Frederic Block refused to dismiss the criminal case against him that arose because Cioffi transferred a portion of his own holdings out of one of these funds without telling investors. In contrast to Fitzwater, Block has not prepared a written opinion giving us the reasons for this decision. But hsi situation isinherently different from that of Cuban's, and as I've noted here before, I thought the motion to dismiss was a matter of slicing the Oscar Meyer pretty thin.

It is still a rum business -- prosecuting "insider trading," at all. But thinking within the box of the law as now exists, Cioffi's position is much worse than that of Cuban's so the difference results of their motions was to be expected.

3. SEC v. Anthony Perez et al. This is a new one. The SEC has charged 5 individuals with insider trading on the ground that they learned that Liberty Mutual was about to announce a bid for Safeway Corp., and acted naturally, buying Safeway themselves.

There are actually three separate complaints, because this information leaked out at least that many times. In two of the three complaints arising out of the safeway bid, a tippee as well as the tipper are named.

The first-named defendant of one of these three complaints, Perez, acquired this information through his work at Goldman Sachs. His tippee? His brother. Ach! the government is now criminalizing brotherly love!

It is also enabling Goldman conspiracy theories. Personally, I much prefer Cerberus conspiracy theories, but Cerberus seems to have had nothing to do with Safeway.