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Unpublished Paper
Insider Trading as Misfeasance: The Yielding of the Fiduciary Requirement
ExpressO (2010)
  • Joanna B Apolinsky, John Marshall Law School

Mark Cuban is a billionaire entrepreneur and active investor. He has also made news of late as a defendant in an action brought against him by the Securities Exchange Commission (SEC) for insider trading. The SEC alleged that Cuban violated §10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 when he sold his stock after the company’s CEO informed him of material, confidential information regarding a planned securities offering by Prior to informing Cuban of the offering,’s CEO first secured Cuban’s assurance that he would keep the information confidential. Cuban agreed. And he ended the call by saying, “Well, now I’m screwed. I can’t sell.” Yet he did. Within a minute after hanging up with the CEO, Cuban directed his broker to sell his entire 6.3% interest in By selling his stock prior to public announcement of the offering, Cuban avoided losses in excess of $750,000.

The court dismissed the SEC’s case against Cuban, reasoning that Cuban’s agreement to maintain the confidentiality of the offering was insufficient to impose on him a duty to disclose the information or abstain from trading on the basis of the information, pursuant to the dictates of insider trading liability set forth in Chiarella v. United States. The case against Cuban is another in a line of cases in which defendants who trade using misappropriated information avoid liability. These cases are rather remarkable, in part because many of these are defendants who ought to know better: they are corporate presidents and board members, savvy investors, and in Cuban’s case, a principal in a company that ferrets out securities fraud. But from an analytical standpoint, these cases are troubling because of the way in which the fiduciary requirement from Chiarella v. United States in the misappropriation theory context hampers a finding of liability.

This characterization of insider trading as fraud by omission requires a finding that a duty to disclose or abstain exist prior to liability by virtue of a fiduciary, or fiduciary-like, relationship. The SEC has faced considerable difficulty overcoming this relationship requirement, thereby frustrating enforcement efforts. Characterizing insider trading as misfeasance, however, rather an as an omission, obviates the need to find this relationship exists. By casting insider trading as misfeasance, the hope is to increase predictability and uniformity in these cases from an analytical standpoint. Moreover, classifying insider trading as misfeasance may increase the reluctance of either the fiduciary misappropriator who discloses his trading intentions to the source, or the converter of information who has no relationship to the source of taking others’ confidential information and using it to trade, thereby benefiting the broader enforcement agenda.

  • insider trading,
  • misfeasance,
  • fiduciary duty
Publication Date
August 24, 2010
Citation Information
Joanna B Apolinsky. "Insider Trading as Misfeasance: The Yielding of the Fiduciary Requirement" ExpressO (2010)
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