Insider Trader Mark Cuban - Lessons Learnt

Trigger

I have been following insider trading cases with some interest for years, not in great detail, but with a keen sense that insider trading is probably one of those elastic criminal offenses allowing prosecutors wide latitude.

The attorney of Mark Cuban. Mr. Lyle Roberts, just published (11/18/2013) a remarkable op-ed in the Opinion pages of the Wall Street Journal titled “Behind the SEC's Pursuit of Mark Cuban/Regulation through litigation is no way to run a government agency.” (Unfortunately, subscribers only).

I am glad that Mr. Cuban is outspoken and I appreciate his strong words after his trial, which first caught my attention.

Summary And Comments

The article is quite long, so I will limit myself to salient points (emphasis added):

1. The SEC resorts to regulation through litigation. The SEC often appears to be making up rules as it goes along.
2. The SEC has for some time engaged in a more aggressive posture pursuing what the SEC describes as “fundamentally unfair for someone to use access to nonpublic information to improperly gain an edge on the market”
3. The article describes briefly the “misappropriation theory”, which the SEC extended in 2000 by issuing Rule 10b5-2. From there, the SEC widened its approach from formal confidentiality agreement to the know famous “wink and a nod” informal agreement and any exchange of any material, nonpublic information. The SEC abandoned the requirement/principle that two agreements are necessary: 1) Confidentiality 2) Non-trade
4. The classical case of insider trading is where a corporate officer without disclosing the material, nonpublic information trades for his own benefit and thereby fraudulently violates his fiduciary duties to the owners.
5. At the other, opposite end of insider trading is the purely coincidental individual who has no relations etc. with a particular publicly traded company who learns by accident (e.g. in the elevator off the premises of the publicly traded company by overhearing the conversation of some other, unfamiliar individuals) of some material, nonpublic information of such a company and trades on it.
6. The jury of Mr. Cuban found that he had informed the company in advance of his intention to sell.
7. The jury of Mr. Cuban also found that the information in question was not material, nonpublic information in the first place. Black eye for the SEC, waste of taxpayer money for everyone else.
8. Not to mention that it cost Mr. Cuban years of his life and enormous legal bills to defend him.

Kudos And Thanks To Mr. Mark Cuban

All securities traders and the general public should be thankful to Mr. Cuban for raising this insider trading overcriminalization issue to prominence.

About The Securities Exchange Commission

This would be enough substance for another blog post by itself. Thus, I will keep it very brief here.

The SEC is an outdated behemoth dating back to the Great Depression and New Deal era. It was one of many overreactions of President F. D. Roosevelt’s administration. In my opinion it should be abolished and to be started over. Perhaps, we do not even need such a federal agency!

What Is Actually Wrong With Insider Trading?

Actually, nothing I would boldly assert!

It is a carefully crafted myth that only wealthy, privileged persons have access to so called material, nonpublic information of publicly traded companies. The Mark Cuban case only serves to strengthen this myth.

Any trading in stocks is generally beneficial! The faster trades on any information is executed the better. So called insider trading is an opportunity for other traders to take advantage of. Do we actually know how many so called insider traders have lost money or were unsuccessful, because they are probably not as often prosecuted.

Insider trading is one of those criminal offenses that make little sense, but offer big government a big stick to harass anyone they don’t like.

If a corporate officer engages in fraudulent or harmful trading in the company in violation of formal agreements, the person works for, then the company should fire this person instantly.