Mark Cuban filed a motion to dismiss the SEC’s insider trading case against him yesterday in the U.S. District Court for the Northern District of Texas.  The SEC filed the case on November 17, charging Cuban with insider trading for selling 600,000 shares of the stock of the Internet search engine company Mamma.com on the basis of material, non-public information concerning an impending PIPE offering.

The SEC alleges that on a phone call with the CEO of Mamma.com, Cuban agreed to keep any information he received about the PIPE offering confidential and, by doing so, entered into a fiduciary relationship of trust and confidence with Mamma.com (as required for insider trading liability).  In his motion to dismiss, Cuban argues that no court has ever held  that a confidentiality agreement alone creates a fiduciary or fiduciary-like duty to act loyally to the source of the information,

Cuban argues that the issue of fiduciary duty in his case is governed by Texas state law, and that

The SEC has failed to allege any facts supporting the notion that a fiduciary or similar relationship of trust and confidence existed between Mr. Cuban and Mamma.com under the relevant law…. Mr. Cuban and Mamma.com are not alleged to have had a pre-existing confidential relationship prior to entering into the supposed confidentiality agreement. Texas courts have refused to find the existence of an informal fiduciary relationship under identical circumstances. See Anglo-Dutch, 243 S.W.3d at 782; Ramco Oil & Gas, 207 S.W.3d at 827.11 Because Mr. Cuban had no fiduciary or similar relationship with Mamma.com under applicable state law, he had no duty to disclose to Mamma.com that he would use the information about the PIPE offering as a basis for trading in Mamma.com shares. Accordingly, Mr. Cuban cannot be liable for insider trading.

Cuban also argues that the court should not consider “federal common law” to determine if a fiduciary relationship existed, but even if it does, the SEC has still failed to adequately plead the existence of the requisite relationship. He states that no federal court has found that a single phone call can create the necessary pre-existing relationship and that that the only case with a similar alleged fact pattern - United States v. Cassese - expressly rejected the idea.

Read Mark Cuban’s Memorandum of Law in Support of Motion to Dismiss