On November 17, 2008, the Securities and Exchange Commission announced that it had filed insider trading charges against Mark Cuban in the United States District Court for the Northern District of Texas, alleging that the billionaire owner of the NBA’s Dallas mavericks franchise had violated the antifraud provisions of the federal securities law when selling his entire stake in the formerly publicly traded company Mamma.com.
Since that formal complaint was filed nearly five years ago, the case has moved forward with spits and starts, traveling through three different courthouses. In 2009, a judge dismissed the lawsuit, but the United States Court of Appeals for the Fifth Circuit reinstated it a year later. While Cuban attempted to delay the trial to accommodate what the SEC called his “Hollywood production schedule,” the regulator agency’s pursuit of the insider trading charges has finally culminated. The trial will open Monday in a federal courtroom in Dallas.
Cuban, whose courtside antics and appearances on the reality show Shark Tank has brought an air of celebrity to the SEC’s efforts to make cases of insider trading a renewed focus for the regulatory agency. Despite the relatively small stakes for Cuban, whose net worth of approximately $2.5 billion can easily swallow the $2 million fine, the SEC is attempting to show a stronger side.
After the financial crisis, the SEC endured public backlash for missing the signs of the coming meltdown and its inability to successfully prosecute many of the individuals involved in the meltdown. Now the SEC, under the guidance of Chair Mary Jo White, is moving to hold individuals — rather than merely institutions — accountable at trial. It is even just coming off its most significant courtroom victory in years, winning a fraud ruling against former Goldman Sachs (NYSE:GS) executive Fabrice Tourre, who had been accused of misleading investors about a financial product linked to subprime mortgages.
As for Cuban, he is fighting to clear his name and upbraid an agency that accused him of trading on confidential information when selling off his stake in the Internet company Mamma.com. “I am disappointed that the Commission chose to bring this case based upon its Enforcement staff’s win-at-any-cost ambitions. The staff’s process was result-oriented, facts be damned. The government’s claims are false and they will be proven to be so,” as Cuban’s lawyer quoted him in a response to the SEC’s initial complaint. If found liable, Cuban will face a fine of about $2 million, which is just about as much money as he has paid the National Basketball Association in fines.
The SEC contends that Cuban, who was then Mamma.com’s largest known shareholder, sold his entire 600,000-share stake in the Internet company despite agreeing in June 2004 to keep material, nonpublic information about an impending private stock offering confidential. According to the complaint, by selling when he did, Cuban avoid about $750,000 in losses, violating several sections of the Securities Act of 1933 in the process. “Unless enjoined, Cuban is likely to commit such violations again in the future,” cautioned the filing.
Executives at Mamma.com expected that the private offering would be opposed by Cuban because it would dilute his 6.3 percent holding and hurt the company’s stock price, which is why Chief Executive Officer Guy Fauré called him on June 28, 2004 to make his pitch for the stock sale. As SEC documents allege, Cuban agreed to keep the information that was discussed confidential.
At the end of the call, Cuban told the CEO, “Well, now I’m screwed. I can’t sell,” according to the formal complaint. Fauré then urged Cuban to consult the investment bank arranging the private offering, and he did, learning additional confidential details of the deal, according to the SEC. Then, one minute after his call to Merriman Curhan Ford, now Merriman Capital, he told his stockbroker to dump his entire stake.
The SEC has said that Cuban of attempted to “conceal his wrongful trading” by creating “a cover story” that involved sending an email to his broker saying, “I want to make sure I was 100 pct kosher on that trade,” according to The New York Times.
Of course, the shareholder’s legal team has argued that email means just the opposite. “Mr. Cuban’s e-mail to his broker, which asked that the investment bank’s compliance department be consulted, obviously sought more scrutiny of his entirely proper trading, not to cover it up,” the lawyers, Christopher J. Clark of Latham & Watkins, Stephen Best of Brown Rudnick, and Thomas M. Melsheimer of Fish & Richardson, said in a statement seen by the publication.
The lawyers added that “far from concealing his trading, Mr. Cuban voluntarily spoke to the S.E.C. without an attorney when they called him about an unrelated” investigation into Mamma.com. ”We expect that when the facts come out,” the statement said, “Mark will be vindicated.”
Luckily for Cuban, the judge that has been assigned to the case, Sidney A. Fitzwater, was the judge that dismissed the case in 2009. At the time, he determined that the SEC had to prove that Cuban had agreed to keep the information confidential and that he had agreed not to trade on it. According to the ruling, the agency never proved that Fauré asked the investor not to trade.
The other problem for the SEC is that its case depends on the memory of Fauré. There is no record of that eight-minute phone conversation between the CEO and the shareholder, and Cuban does not remember the nine-year-old conversation. Significantly, during his initial interview with the SEC, Fauré did not mention that Cuban had immediately agreed to keep the information private. It was not until his second interview that the CEO explained that Cuban had said “something to the effect” of “um hum, go ahead” when Fauré said he had “confidential information” to relay, as the Times reported.
Thanks to the difference between the testimonies, Cuban’s lawyers can portray Fauré as an unreliable witness. His lawyers can also point out that Fauré’s emails to Cuban did not make any mention of a confidentiality agreement. Mamma’s lawyers recommend that he receive a signed contract from Cuban, but he did not.
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