As set forth by the Court of Appeals, the crux of the allegations in the complaint were as follows:
The core allegation is that Cuban received confidential information from the CEO of Mamma.com, a Canadian search engine company in which Cuban was a large minority stakeholder, agreed to keep the information confidential, and acknowledged he could not trade on the information. The SEC alleges that, armed with the inside information regarding a private investment of public equity (PIPE) offering, Cuban sold his stake in the company in an effort to avoid losses from the inevitable fall in Mamma.com’s share price when the offering was announced.The district court granted Cuban's motion to dismiss because, as described by the Court of Appeals, the district court "found that, at most, the complaint alleged an agreement to keep the information confidential, but did not include an agreement not to trade" and "[f]inding a simple confidentiality agreement to be insufficient to create a duty to disclose or abstain from trading under the securities laws[.]:
The Court of Appeals, reading the complaint in a light most favorable to the SEC, reversed holding that "[t]he allegations, taken in their entirety, provide more than a plausible basis to find that the understanding between the CEO and Cuban was that he was not to trade, that it was more than a simple confidentiality agreement."
Specifically, in relevant part, the Court of Appeals held as follows:
In isolation, the statement 'Well, now I’m screwed. I can’t sell' can plausibly be read to express Cuban’s view that learning the confidences regarding the PIPE forbade his selling his stock before the offering but to express no agreement not to do so. However, after Cuban expressed the view that he could not sell to the CEO, he gained access to the confidences of the PIPE offering. According to the complaint’s recounting of the executive chairman’s email to the board, during his short conversation with the CEO regarding the planned PIPE offering, Cuban requested the terms and conditions of the offering. Based on this request, the CEO sent Cuban a follow up email providing the contact information for Merriman. Cuban called the salesman, who told Cuban 'that the PIPE was being sold at a discount to the market price and that the offering included other incentives for the PIPE investors.' Only after Cuban reached out to obtain this additional information, following the statement of his understanding that he could not sell, did Cuban contact his broker and sell his stake in the company.
The allegations, taken in their entirety, provide more than a plausible basis to find that the understanding between the CEO and Cuban was that he was not to trade, that it was more than a simple confidentiality agreement. . . . Under Cuban’s reading, he was allowed to trade on the information but prohibited from telling others—in effect providing him an exclusive license to trade on the material nonpublic information. Perhaps this was the understanding, or perhaps Cuban mislead the CEO regarding the timing of his sale in order to obtain a confidential look at the details of the PIPE. We say only that on this factually sparse record, it is at least equally plausible that all sides understood there was to be no trading before the PIPE. That both Cuban and the CEO expressed the belief that Cuban could not trade appears to reinforce the plausibility of this reading.