© 2014 The Texas Lawbook.
By Natalie Posgate and Mark Curriden – (October 2, 2013) – The U.S. Securities and Exchange Commission’s star witness against Mark Cuban testified Wednesday that he made it clear that the information he provided the Dallas Mavericks owner nine years ago was confidential and that Cuban agreed to not trade on that information.
But former Mamma.com CEO Guy Fauré, testifying by pre-recorded video deposition, admitted that he never asked Cuban to sign a written confidentiality agreement and that he never considered letting Cuban know by email that the information he wanted to discuss with him was confidential.
The SEC plans to call Cuban to the witness stand tomorrow.
Cuban is accused by the SEC of using insider information provided to him by Fauré when he sold his six percent ownership share of Mamma.com stock in June 2004, just hours before the company announced it would conduct a private equity offering to raise capital for the Canadian search engine company.
By selling prior to the public announcement, Cuban avoided losing more than $750,000, the SEC alleges.
In nearly three hours of videotaped depositions played for the jury Wednesday, Fauré walked jurors through the critical day in dispute on June 28, 2004.
Fauré testified that he emailed Cuban just before lunch, telling the Dallas billionaire to call him ASAP. He said Cuban called him a few minutes later as he stepped out of his office elevator as he was on his way to lunch.
The entire case rests on the eight-minute, 35-second phone conversation that followed.
“Mr. Cuban called me and I said, ‘Mark, I’ve got confidential information,’” Fauré testified.
Fauré said he proceeded to tell Cuban that Mamma.com planned to conduct a private securities offering, which would have diluted the value of Cuban’s 600,000 shares of stock in the company.
When asked Cuban’s response, Fauré said, “I don’t remember his exact words, but he said something to the effect of ‘Okay, uh-huh, go ahead.’ His response was very negative. At the end of the call, he said, ‘Well, now I’m screwed. I can’t sell.’
“Mr. Cuban was not impolitely yelling at me, but he was not happy,” Fauré said.
The former Mamma.com CEO frequently repeated in his deposition that the “Well, now I’m screwed, I can’t sell” comment meant Cuban recognized he couldn’t trade his shares until after the PIPE went public.
If the government can prove the seven-word sentence as fact, it is perhaps the SEC’s strongest shot at winning the trial.
“As anticipated, he [Cuban] initially ‘flew off the handle’ and said he would sell his shares (recognizing that he would not be able to do anything until we announced the equity), but then asked to see the terms and conditions,” Mamma.com chairman David Goldman wrote in a memo by him and Fauré to the company’s board of directors shortly after the call with Cuban on June 28, 2004.
Fauré testified by a pre-recorded video deposition from 2011. He declined to testify in person at the trial. Because he is a Canadian citizen, he cannot be forced to testify by subpoena.
Tom Melsheimer, one of Cuban’s lead lawyers, presented jurors with emails from the SEC to Mamma.com officials in 2004 stating the federal regulatory agency was investigating the technology company for possible stock manipulation.
The defense lawyer said the documents show Fauré had a “bias and motivation” to fabricate testimony against Cuban in order to curry favor with the SEC.
Melsheimer, in opening statements Tuesday, said the evidence “seriously undermines” Faure’s testimony by impeaching his credibility.
Jan Folena, the SEC’s lead lawyer, vigorously objected to the documents being shown to the jury.
“I cannot emphasize enough how damaging and prejudicial” this would be to our case, Folena told U.S. District Chief Judge Sidney Fitzwater. “He is the key witness. It is his word against Mr. Cuban. This is incredibly unfair. If we could get him here, we would.”
Though Fauré’s testimony stole the show at the trial today, Arnold Owen’s is not to be undermined.
Owen, the investment banker responsible for advising Mamma.com in its 2004 PIPE offering and giving Cuban more details about it, provided key components to the defense’s case that the PIPE information was never confidential. Ironically, he was one of the SEC’s witnesses.
He said during cross-examination Wednesday morning that he didn’t recall having knowledge of Fauré and Cuban reaching a confidentiality agreement; that when Goldman asked Fauré to speak with Cuban for a courtesy call, he didn’t remember Goldman telling him that they would be discussing confidential information when Cuban called; and the outside investors of the Mamma.com PIPE never had a confidentiality agreement and were never restricted on trading shares before the PIPE public announcement.
Owen added that in his previous brokerage investing jobs, he never had to ask potential investors to submit to a confidentiality agreement regarding PIPEs. In fact, investors would often tell others about the PIPE, which generally, by coincidence or not, served as a word-of-mouth tactic to draw more investors in to the PIPE.
Owen said he wasn’t aware at the time of the offering of any guidance by the SEC on whether financial brokerage firms should tell their clients whether PIPEs were material, non-public information to investors.
The SEC still gained something helpful from Owen, however.
When the government approached the stand to re-examine Owen, SEC attorney Duane Thomas pointed out a document written by an executive at Merriman Curhan & Ford (Owen’s employer) that says the company always regards PIPE knowledge as material, non-public information.
Owen said he had no recollection of this statement but had no reason to believe it wasn’t true since it was in a written statement.
Owen also said that he personally has never traded on a PIPE transaction before it went public.
Legal experts following the trial say that Cuban’s testimony Thursday will be the most important and possibly decisive evidence the jury will hear in the case. They expect the SEC will try to agitate Cuban in order to get him to make an incriminating statement.
Cuban was asked as he was leaving the courthouse Wednesday if he was ready for his testimony Thursday. He responded, “The truth never changes.”
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