SEC Insider Trading Suit Not A Slam Dunk, Mark Cuban Says (Law360)

By Brian Mahoney

Sports billionaire Mark Cuban on Friday looked to put to rest a U.S. Securities and Exchange Commission suit accusing him of insider trading, telling a Texas federal judge that the information he received about a company's equity offering had already been distributed to several private investors and was never protected by a confidentiality agreement.

In a 49-page motion for summary judgment, Cuban, who owns the Dallas Mavericks, said news from Mamma.com Inc.'s chief executive officer about an impending private investment in public equity offering had been disclosed to at least three investment companies, who themselves had marketed the offering to their clients. Cuban said the SEC has no case.

"Mamma and its placement agent had been providing the information to prospective investors without any confidentiality restrictions and these entities had passed the information on to others in the same manner," Cuban said. "The company also had publicly announced it was contemplating a PIPE and had affirmatively declined to place any confidentiality restriction into the offering's purchase agreement."

Cuban's motion is the latest move in his game plan to dodge allegations that he unlawfully used information about the PIPE to avoid a $750,000 loss by selling 600,000 shares of the search engine company.

At the heart of the SEC's case is a 2004 phone call with Mamma CEO Guy Fauré in which a fuming Cuban blasted the company's plans for the offering, purportedly telling Fauré that he "was screwed" and couldn't sell off his shares in light of the phone call.

The SEC contends that Cuban nonetheless sold all his Mamma.com stock by the end of the next day, June 29, 2004. Mamma.com announced the PIPE after the markets closed that day, prompting its stock to open June 30 at $11.89, down 9.3 percent from the prior day's close of $13.10. 

But Stephen A. Best of Brownstein Hyatt Farber Schreck LLP., who represents Cuban, said his client will dispute the veracity of the phone remarks if the case reaches trial.

"We're going to claim at trial that the statement was never made, but we can't do that here," Best said, saying that Cuban had to rely on undisputed facts in the current motion to dismiss.

Best also said that the SEC has a weak case, because the phone call in question never involved an explicit agreement not to trade.

"The information about Mamma's PIPE was disseminated in the marketplace in 2004; nobody ever got confidentiality agreements of nonuse," Best said. "You can't make an agreement ex-post facto."

The prospective investors who purportedly knew about the PIPE before Cuban include investment bank Merriman Curhan & Ford Inc., hedge fund Sage Capital LLC and Canadian securities firm Orion Securities Inc., according to Cuban's memorandum.

Asked why the SEC would choose to pursue the suit against Cuban if the information he had received was already public, Best said his client's public stature may have made him more vulnerable to an insider trading suit.

"I can guess the thought of going after a wealthy billionaire would be productive to their enforcement agenda," Best said.

In September 2010, a three-member U.S. Fifth Circuit Court of Appeals panel revived the case following a federal judge's 2009 dismissal, saying it was plausible that Cuban could have thought he was restricted from trading on the information he obtained about the impending PIPE.

In July 2011, a judge rejected Cuban's attempt to use the so-called unclean hands defense — in which he argued the SEC acted with unclean hands through "egregious acts of misconduct" that prevented him from warding off the suit or properly defending himself once it was brought — because it was only available in "strictly limited circumstances" that didn't apply in this instance.

An SEC spokesperson declined to comment Monday.

Cuban is represented by Stephen A. Best and Brian D. Nysenbaum of Brownstein Hyatt Farber Schreck LLP, by Lyle Roberts and George E. Anhang of Cooley LLP, by Leslie A. Maria of White & Case LLP, by Christopher Clark of Latham & Watkins LLP and by Thomas M. Melsheimer and Steven H. Stodghill of Fish & Richardson PC.

The case is SEC v. Cuban, case number 3:08-cv-02050, in the U.S. District Court for the Northern District of Texas.

All Content © 2003-2012, Portfolio Media, Inc.

This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP, or any other affiliated practice or entity (collectively referred to as “Cooley”). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Do not send any confidential information to Cooley, as we do not have any duty to keep any information you provide to us confidential. This content may be considered Attorney Advertising and is subject to our legal notices.