In the latest celebrity insider trading case, a federal district court in Dallas dismissed the Securities and Exchange Commission's insider trading complaint against Mark Cuban, the owner of the NBA's Dallas Mavericks.

The case, Securities and Exchange Commission v. Mark Cuban, No. 3:08-CV-2050-D (N.D. Tex. July 17, 2009), is notable because the district court found that an agreement to keep material nonpublic information confidential without an implicit or explicit agreement to refrain from trading is not sufficient to establish a duty not to trade under the "misappropriation theory" of insider trading. The case raises an interesting issue as to what type of communication -- a formal written agreement, an e-mail exchange, some other form of missive or a simple telephone conversation -- is enough when disclosing material nonpublic information to a corporate "outsider" to clearly establish the recipient's agreement to refrain from trading on the information.

Cuban owned 6.3% of Mamma.com Inc., a Nasdaq-listed Internet search company, and at the time was its largest shareholder. Mamma.com was in the process of raising equity through a private investment in public equity, or PIPE, offering when the CEO called Cuban to invite him to participate. The CEO prefaced the call with Cuban by saying that he had confidential information that he wanted to share, and Cuban agreed to keep the information confidential.

Relying on Cuban's oral agreement to keep the information confidential, the CEO told Cuban that the company was undertaking a PIPEs offering. The information was not well-received by Cuban, and at the end of the call, Cuban reportedly said, "Well, now I'm screwed. I can't sell."

In a subsequent e-mail to Cuban, the CEO suggested that Cuban get in touch with the company's investment bank to get more details about the offering. Cuban made that call, and following that conversation, Cuban instructed his broker to sell all of his shares of Mamma.com the day before the PIPE offering was publicly announced. The SEC alleged that Cuban avoided $750,000 in trading losses after the price of Mamma.com's stock dropped nearly 10% following the announcement.

The SEC's insider trading case against Cuban was brought under the "misappropriation theory" of insider trading. Under this theory, a person violates Rule 10b-5 when he or she misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. Put simply, the issue in the case was whether Cuban owed a duty not to trade on the material nonpublic information he received from Mamma.com's CEO based on his oral agreement to keep the information confidential. The court said no. While an agreement between a corporate "outsider" and the source of the material nonpublic information can create a duty that when breached can give rise to insider trading liability, the court said that the agreement must consist of more than an express or implied promise to keep information confidential -- it must contain an implicit or explicit agreement not to trade on the information or to use it for personal gain.

In the court's view, the obligation to keep the information confidential and the obligation not to trade on it are distinct. Since deception is essential to a 10b-5 claim, the court found that Cuban had not acted deceptively; he only agreed to keep the information confidential but never agreed to refrain from using it for personal gain. The court also rejected the notion that the CEO's "unilateral" expectation (apparently only expressed in an e-mail to the board of directors and not in an e-mail to Cuban) that Cuban would not trade on the information imposed a duty on Cuban to refrain from trading and created insider trading liability.

Is agreeing to keep information confidential the same as agreeing not to use that information for personal gain? Many would have thought so before the Cuban case. But the court viewed these as entirely distinct obligations, and because the SEC had not proved an express agreement on the trading component, the court dismissed the claims against Cuban: game over, at least for now.

Although the SEC's complaint was dismissed, the court gave the SEC 30 days to replead the case. While the court's decision is the view of only one of many district courts, the celebrity nature of the litigant has put a spotlight on the core issue. So while we wait for the final buzzer, market participants are left wondering what best practices to put in place to minimize or eliminate the risk from this sort of situation.

The Cuban decision serves as a reminder to corporate officers, investment bankers and other market participants that the disclosure of material nonpublic information presents risks to both sender and recipient. The following are a few practical suggestions for addressing those risks.

Get it in writing, the missive rule: Recognizing the possibility that other courts may follow the lead of the Cuban court and carefully scrutinize the exact nature and content of confidentiality agreements, it is advisable to obtain the recipient's written agreement to keep material nonpublic information confidential and to refrain from trading on that information. Although oral confidentiality agreements are enforceable, the absence of a written record could easily lead to "he says, she says" evidentiary disputes. Since e-mail is the functional equivalent of a formal writing, a confidentiality agreement does not need to be embodied in a formal written document; an e-mail will suffice. But to avoid evidentiary disputes down the road, it may be best to obtain a two-way e-mail, in which one party sends an e-mail stating the requirement that there be no trading and the recipient acknowledges the agreement.

Implications for PIPE transactions: Disclosure of material nonpublic information in PIPE offerings presents some of the most common opportunities for the misuse of material nonpublic information. Given the attention that the Cuban decision focuses on the specifics of confidentiality agreements, the confidentiality agreement used in a PIPE offering should be reviewed carefully to ensure that both obligations -- to keep the information confidential and to refrain from trading -- are spelled out clearly. At a minimum, it may be helpful to specify that the confidential information may not be used for any purpose other than to evaluate the potential transaction. Although the Cuban court did not address this, it would seem to satisfy the courts' requirement that the parties explicitly or implicitly agree not to trade on the basis of the information.

Implications for premarketed offerings: In premarketed public offerings (sometimes referred to as "wall-crossings"), the material nonpublic information is generally disclosed in a telephone conversation preceded by an agreement embodied in an e-mail to the potential investor to keep the information confidential. It may be best to ensure that the e-mail includes an agreement that the investor will not trade on the information, and from an evidentiary perspective, it would be best if the e-mail was a two-way exchange. It is interesting to note that in the Cuban case, the CEO did not send Cuban a follow-up e-mail confirming his understanding that Cuban would not trade on the information. The case may have come out differently if he had done so.

Regulation Fair Disclosure: While not an issue in the Cuban case, Regulation Fair Disclosure prohibits public companies from making selective disclosure of material nonpublic information before making such information available to the public. The rule contains a specific exception for selective disclosures to persons who expressly agree to maintain the information in confidence. While oral confidentiality agreements satisfy Regulation FD, companies that intend to rely on confidentiality agreements as the basis for intentional selective disclosure would be well-advised to obtain a written agreement that includes an explicit agreement not to trade.

Considerations for those who disclose: Those who disseminate material nonpublic information pursuant to confidentiality agreements should remain alert to their own potential exposure. Even if other courts agree that a person who receives material nonpublic information (the "tippee") is immune from insider trading liability absent an agreement not to trade, those who disclose that information (the "tipper") may nevertheless be at risk.

Tippers often acquire their information through a fiduciary or quasi-fiduciary relationship and, therefore, themselves owe duties of care and loyalty to their source of information. The Cuban decision in no way relieves a tipper of those obligations. In certain circumstances, tippers who provide material nonpublic information knowing that their tippee intends to trade on the information could be subject to claims of insider trading.

Danielle Carbone and Stuart Fleischman are New York-based Capital Markets partners at Shearman & Sterling LLP. David J. Beveridge, also based in New York, is head of the firm's Capital Markets-Americas Group.