Insider trading under U.S. law has developed through a case-by-case interpretation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 in the federal courts. There are three basic elements to an insider trading claim. The elements include purchasing or selling a security after receiving information that is material, nonpublic, and obtained or used in breach of a fiduciary or similar duty.
There are two major theories of insider trading under federal law flowing from two different types of duties: the “classical” theory and the “misappropriation” theory. Under the classical theory of insider trading, the agents of an issuer of securities may be corporate insiders (e.g., directors, officers, employees or controlling shareholders) or they may be “temporary” insiders by virtue of a professional relationship giving the agent access to nonpublic information about the issuer. A temporary insider is typically a lawyer, banker, accountant or consultant. If someone falls into either category and receives material, nonpublic information, then that person must either disclose such information to his counterparty before trading or abstain from trading. Under the misappropriation theory, a person will be held liable if he or she traded on material, nonpublic information and owed a duty to maintain trust and confidence to the source of that information.
The authors take you through the elements of insider trading and how it relates to the public information about the Mark Cuban case.
They also take us through the industry practice for PIPE transactions.
In a typical PIPE transaction, the placement agent will contact an investment fund’s compliance officer or in-house counsel and disclose limited information about the PIPE issuer. The compliance officer then runs this information against the fund’s restricted list, which is a list of investments in which the fund currently has a position. This is done to ensure that the fund will be able to freely trade investments it has already made. If the compliance officer finds the issuer’s name on the fund’s restricted list, he generally will decline to learn anything further about the offering. If the issuer’s name is not on a restricted list and the potential investor is interested in participating in the PIPE transaction, currently, best practices call for the placement agent either to have such investor sign a confidentiality agreement or a securities purchase agreement that includes a confidentiality provision, or to read a detailed script regarding confidentiality and have the investor consent in the presence of witnesses. This procedure is meant to prevent the circumstances now being litigated between the SEC and Mr. Cuban.