Recent years have seen important developments in insider trading liability under the misappropriation theory pursuant to § 10(b) of the Securities Exchange Act. The SEC has aggressively pursued enforcement actions that push the boundaries of the Supreme Court’s insistence on a fiduciary or “fiduciary-type” duty to support insider trading liability. While many courts have accepted the government’s more relaxed interpretation of the duty requirement, the 2009 district court opinion in SEC v. Cuban suggests increasing judicial frustration over the SEC’s approach. The Fifth Circuit declined to overturn the Cuban court’s more stringent interpretation of the duty requirement and remanded the case on factual grounds, thus rendering the lower court’s reasoning potentially viable for future litigants.
This article argues that theCuban district court opinion generates significant problems in its own right, and courts should therefore be hesitant to adopt its analysis. The Cuban court’s distinction between non-use and confidentiality creates a rift in the duty analysis between “tipper-tippee” liability and other § 10(b) cases, in marked contrast to established case law. Furthermore, by strongly encouraging parties to contract over non-use, Cuban implicitly adopts a default position that forces substantial transaction costs on the relevant parties. This article proposes an alternative default, industry custom of non-use, which responds to concerns voiced by the Cuban court while reducing the contracting costs Cuban imposes on firms that desire to limit insider trading.