Insider’s Tip #5 for Wannabe Insider Traders

The patron saint of wannabes everywhere

We already spread the good news about Mark Cuban’s avoiding liability for selling stock when he had information he had agreed to keep confidential (but hadn’t agreed not to trade on).

Turns out that excitement is short-lived. We already knew this was a marginal case based on the unique facts. Now we know there are cases where a party can be guilty of insider trading even absent a fiduciary duty.

Details, and the latest tip, after the jump.

Peter Henning, a law professor at Wayne State (heir to Steven Davidoff’s throne?) did a guest turn as WSJ Law Blogger to look at the Cuban case and the lower-profile Dorozhko case.

If insider-trading cases are the SEC’s “bread and butter,” as Henning put it, they’re our Ben & Jerry’s Triple Caramel Chunk – delicious, supererogatory, guilty pleasures.

Sort of. The Second Circuit said the SEC didn’t need to prove the existence of a fiduciary duty for Dorozhko – which was exactly how Cuban got off.

Huh?

In the Cuban case, the SEC invoked Rule 10b5-2, which defines a “duty of trust and confidence” as arising whenever “a person agrees to maintain information in confidence.” But this didn’t fly, chiefly because such a duty is not a fiduciary duty. Insider trading is not about proving someone’s untrue to his word. Rather, it is fraud based on a deception when one owes a duty to another entity not to trade on nonpublic information. Without the duty there is no fraud.

In the Dorozhko case, the SEC could not establish that the defendant had a fiduciary duty because he was simply a thief, and thieves don’t owe a duty to anyone. The Commission’s theory was that the fiduciary duty requirement only applies when a person receives confidential information with a duty not to trade on it. For Dorozhko, however, he lied to obtain the information by hacking into the computer system that stored the news release. The Second Circuit ruled that this was enough.

So while there was no fiduciary duty in Cuban, hence no insider trading, there was no need for one in Dorozhko because his lie was the fraud.

That means Insider’s Tip #5 for Wannabe Insider Traders is:

Don’t trade on information you stole.

Better yet, don’t steal in the first place, but we’re preaching to the lowest common denominator.

Related posts:

1. Insider’s Tip #4 for Wannabe Insider Traders
2. Insider’s Tip #6 for Wannabe Insider Traders
3. Insider’s Tip #1 for Wannabe Insider Traders
4. Insider’s Tip #2 for Wannabe Insider Traders
5. Insider’s Tip #3 for Wannabe Insider Traders