The debate over the proper reach of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 as tools to combat insider trading was rekindled last month following two decisions in enforcement actions by the U.S. Securities and Exchange Commission against non-insiders who traded on material, nonpublic information. In SEC v. Cuban,1 a Texas federal district court dismissed the SEC’s enforcement action against Dallas Mavericks owner Mark Cuban for insider trading, holding that an express agreement to maintain nonpublic information in confidence is by itself insufficient to create the duty of trust and confidence which must underlie insider trading liability under a misappropriation theory. Cuban thus concluded that Rule 10b5-2(b)(1), which provides that a “duty of trust or confidence” sufficient to give rise to insider trading liability exists “[w]henever a person agrees to maintain information in confidence” exceeds the SEC’s rulemaking authority to proscribe conduct that is deceptive.
In a significant ruling addressing what may constitute a “deceptive device” under §10(b), the U.S. Court of Appeals for the Second Circuit in SEC v. Dorozhko2 held that a computer hacker who illegally accesses material, nonpublic information and then trades on it can be liable for securities fraud even if he did not violate any fiduciary duty in obtaining the information. Dorozhko held that U.S. Supreme Court case law requiring the existence of a fiduciary duty to disclose the intention to trade or abstain in order to find a “deceptive device” prohibited by Section 10(b) applies only to insider trading cases based on an omission. The court enunciated a theory of liability for alleged fraud cases involving an affirmative misrepresentation, under which misrepresenting one’s identity in order to gain access to secure information may constitute an actionable misrepresentation, and that such a misrepresentation can be a “deceptive device” within the meaning of §10(b).
Theories of Liability
