New Book on SEC v. Cuban Provides a Compelling Look at a Big-Stakes Securities Case
If you wanted to attend the U.S. Securities & Exchanges Commission’s federal insider trading trial against Mark Cuban but you weren’t able to, a new book that’s hit the stands is your next best bet on experiencing the litigation saga.
Marc I. Steinberg’s Securities and Exchange Commission v. Cuban relives the entire lifeline of the litigation, from the day the SEC began investigating Cuban after he sold his shares in Mamma.com in 2004 to the moment a federal jury in Dallas cleared Cuban of all charges brought by the government in 2013.
Steinberg is the Radford Professor of Law at Southern Methodist University’s Dedman School of Law and a securities law guru who Cuban retained early on as an expert in the litigation (although he never testified at trial).
Colleagues, friends and others involved in the case (including Mark Cuban Companies General Counsel Robert Hart) gathered at Al Biernat’s in Dallas on Monday to celebrate the release of Steinberg’s book, one of 36 that he has authored.
The book serves as a useful resource for a wide readership. Though Steinberg wrote it to appeal to law students looking to study the anatomy of a case from start to finish, Securities and Exchange Commission v. Cuban is a must-read for securities law junkies, Dallas Mavericks fans, or anyone who’s just an admirer of a good courtroom drama.
“It’s a securities wonk’s dream,” Cuban told The Texas Lawbook in an email. “It provides every detail of my experience with the SEC.”
Tom Melsheimer, Cuban’s lead attorney at trial, concurred, characterizing Steinberg’s work as “a memory book of the case.”
“It’s all put together in a very organized way,” Melsheimer told The Lawbook. It’s a useful reference for anyone looking for information on the case. The observations Marc makes of the trial are interesting and insightful.”
Steinberg sifted through the thousands of documents from the 1,795-day case so you don’t have to, resulting in a sub-350-page manuscript of the key and most compelling pieces of the court record.
The SEC filed a lawsuit against Cuban in November 2008 alleging he violated federal securities laws when he sold his 600,000 shares of Mamma.com the same day the company’s CEO told Cuban that the Canadian search engine would participate in a private investment in public equity (PIPE) offering.
The government alleged Cuban did so despite being told that it was material, confidential information and that he illegally avoided a $750,000 loss as a result to the detriment of other investors in the public market.
Cuban vehemently denied the allegations, compiled a legal team that racked up $12 million in fees, and, almost five years later, was cleared of all charges after a three-week jury trial in then-Chief U.S. District Judge Sidney Fitzwater’s courtroom in the Northern District of Texas.
The book documents the many dramatic twists and turns – from the trial court’s initial dismissal of the lawsuit, to the Fifth Circuit’s reversal, to the summary judgment proceedings to the trial itself and the colorful dialogue and testimony throughout (including the butting of heads between Cuban and lead SEC lawyer Jan Folena).
Beyond providing a record of one of the most famous SEC cases, Securities and Exchange Commission v. Cuban provides insightful commentary by Steinberg on the key decisions the SEC made in the case that led to an unfavorable outcome for the government.
Below is an excerpt from the analysis portion of Steinberg’s book, re-published with his permission. (Editor’s note: footnotes have been omitted for narrative clarity).
Excerpt…
I. WHY DID THE SEC FILE THIS LAWSUIT IN DALLAS?
Mr. Cuban is well known in Dallas, nationally, and globally—as an astute entrepreneur and investor, key participant on the program “Shark Tank,” owner of the NBA’s Dallas Mavericks, and celebrity on “Dancing with the Stars.” Being the owner of the Dallas Mavericks and an avid basketball hoopster, Mr. Cuban well knows the distinct advantage of playing on one’s home court. Ordinarily, in any athletic contest, ranging from high school tennis to collegiate football to NBA basketball, the “home” team is more likely to perform better in its “friendly confines” than playing its opponent on “enemy turf.” As applied to this Matter, the inquiry is: “Why did the SEC sue Mr. Cuban in federal district court in the city of Dallas Texas?” This inquiry becomes more pressing in view that this case was pursued by the SEC staff in the Commission’s “home office” situated in Washington D.C. rather than by the Commission’s staff located in its Fort Worth Texas regional office. Customarily, a case investigated and tried by regional office staff will be litigated in those federal courts that are in that region. By contrast, “home office” cases, with some frequency, are filed in any eligible jurisdiction that the SEC deems attractive.
Given that Mamma.com was not a Texas-based company and that Mr. Cuban’s trades of Mamma.com stock were not consummated in Texas, it appears that the Commission could have brought suit elsewhere, perhaps in New York City, New Jersey, or San Francisco. With some frequency, for example, the SEC has filed suit in federal district court in the Southern District of New York even when the defendant’s residence and alleged misconduct occurred to a significant degree in another jurisdiction.
In Dallas, Mr. Cuban maintains an excellent reputation as being an out- standing sports franchise owner and benefactor to the enhancement of the Dallas community. Outside of Dallas, he may or may not be viewed as positively. At the time of trial, Mr. Cuban had been levied money fines by the NBA in over a dozen incidents. Accordingly, a New York City, San Francisco, or New Jersey jury may have been more to the liking of the SEC.
Nonetheless, Dallas clearly was the venue with the closest nexus to the conduct that transpired. In this respect, while in Dallas or in close proximity, Mr. Cuban: resided; received and transmitted the subject emails; engaged in the subject telephone calls; and ordered the selling of his Mamma.com stock. This sell order was communicated to Mr. Cuban’s broker whose office like- wise was in Dallas who thereupon transmitted the order from his Dallas brokerage office.
By contrast, Mamma.com was a Canadian company and had no U.S. headquarters. The only significant nexus to the Northern District of California was that Mr. Arnold Owen of Merriman was situated in San Francisco when he engaged in the telephone conversation with Mr. Cuban regarding the Mamma.com PIPE transaction. With respect to the Southern District of New York, Mr. Cuban’s sales of Mamma.com stock were effected on the Nasdaq Stock Market whose market site is situated at Times Square, New York City. In addition, Mr. Cuban’s trades may have been routed through the New York City offices of UBS. And in regard to New Jersey, that state is the home of Nasdaq’s Data Center (Carteret, New Jersey). Hence, with respect to each of these locales, there arguably transpired sufficient conduct to enable the Com- mission to bring the action in each such jurisdiction.
Pursuant to Section 27 of the Securities Exchange Act, the Commission may institute suit in any federal judicial district “wherein any act or transaction constituting the violation occurred. . . .” Arguably, the SEC could have elected to bring this action against Mr. Cuban in the Southern District of New York (where the Nasdaq market site is situated), New Jersey (where the Nasdaq Data Center is located), or in the Northern District of California (where Mr. Owen engaged in the telephone discussion with Mr. Cuban regarding the Mamma.com PIPE transaction)—assuming that “any act or transaction constituting the violation occurred” in each such respective jurisdiction.
Assuming that the SEC was authorized and had elected to file the case in federal district court in any of the above jurisdictions, Mr. Cuban likely would have sought a change in venue under 28 U.S.C. §1404(a) to the Northern District of Texas. It is uncertain whether Mr. Cuban would have succeeded. Nonetheless, Dallas—the Northern District of Texas—clearly was the locale in the United States where nearly all of the key events transpired. Accordingly, the SEC acted consistently with the statutory directives in its determination to institute this litigation in the Northern District of Texas. While the Com- mission may be commended for selecting the district wherein by far the most significant contacts and events allegedly occurred, SEC critics proffer a less gentle rationale: The Commission wanted to inflict as much pain and embarrassment upon Mr. Cuban as practicable when bringing suit, thereby perhaps inducing him to settle the proceeding—and the Northern District of Texas clearly met that objective. Irrespective of the SEC’s motives, acting consistently with its usual pattern of “not gaming the system,” the SEC’s election to institute the action in Dallas was appropriate and consistent with notions of “fair play.”
The foregoing discussion is not meant to imply that the SEC would have been victorious if it had sued Mr. Cuban in New York City, New Jersey, or San Francisco. That is a question which cannot be definitively answered. As addressed below, there existed additional fundamental reasons why the Com- mission did not succeed. Nonetheless, for reasons not publicly known, to its credit, the SEC opted to play on Mr. Cuban’s turf. As frequently occurs, the “home team”—here, Mr. Cuban—prevailed as the “winner.”
II. GOING TO TRIAL WITH THE GOVERNMENT—AN EXPENSIVE ORDEAL
An overwhelming percentage of SEC enforcement actions are settled with the defendant neither admitting nor denying the allegations set forth in the Commission’s Complaint. From the SEC’s perspective, the relief procured in these settlements ordinarily is what the Commission largely seeks, including the ordering of injunctions, disgorgement of ill-gotten gains, money penal- ties, and at times even more drastic measures such as the imposition of officer and director bars. These sanctions are levied without the Commission going through the travails of trial, thereby enabling the SEC to utilize its personnel to pursue other suspected wrongdoing. From the defendant’s standpoint, relatively expeditious resolution of the SEC’s action—without admitting or denying the Commission’s allegations—enables such defendant to move for- ward, lessens the specter of the Commission making a criminal referral to the U.S. Department of Justice, drastically reduces the financial costs incurred in litigating with the SEC, alleviates to some degree the anxiety and distractions that would arise, and prevents complainants in private litigation to utilize offensive collateral estoppel as a strategy to recover damages against the subject defendant.
Not all defendants opt to settle and several who have elected to proceed to trial have emerged victorious. To take this route in an effective manner will “take plenty of money”—hundreds of thousands—if not millions—of dollars. The wherewithal to undertake this journey generally is available only for those defendants who are wealthy or who have adequate insurance cover- age—as only they will have sufficient financial resources to mount an effective defense. Mr. Cuban’s litigation with the SEC illustrates the costs entailed in presenting an impressive defense. As reported, retaining premier legal counsel and support personnel, Mr. Cuban incurred roughly $12 million of legal fees in this litigation. Hence, proceeding to trial with the government is a daunting task—both from an emotional and financial perspective.
III. THE MURKY INSIDER TRADING LAW IN THE UNITED STATES
To prove its case against Mr. Cuban, among other things, the SEC was required to show that the information regarding the Mamma.com PIPE trans- action was both material and nonpublic. Perhaps surprising to some as seen by the jury findings set forth in Chapter 7, the Commission failed in this quest. More precisely, in response to the questions: Whether Mr. Cuban received or traded on material, nonpublic information regarding Mamma.com’s forth- coming PIPE transaction, the jury answered “No”.
Nonetheless, the SEC’s theory in bringing its case against Mr. Cuban illustrates the murkiness of U.S. insider trading law. It was not disputed that Mr. Cuban received the information regarding the impending Mamma.com PIPE transaction from two sources: (1) the company’s CEO Mr. Guy Fauré; and (2) Mr. Arnold Owen of Merriman that served as Mamma.com’s placement agent for the PIPE transaction. In developed markets outside of the United States, if an individual knowingly receives material and nonpublic information from an insider, such as a corporate executive, he or she cannot trade the subject securities until that information is adequately disseminated to the investing public. This broad prohibition is widely embraced in developed markets throughout the world—but not in the United States.
Prior to restrictive U.S. Supreme Court decisions in the insider trading area that commenced in 1980, liability was imposed under the federal securities laws’ anti-fraud provisions in a far more expansive manner. Utilizing the parity of information or equal access rationale, the law of insider trading that then existed resembled the framework that today is embraced by developed markets outside of the United States. In this country, the more expansive approach of yesteryear remains viable only when insider trading occurs in connection with a tender offer. In that setting, SEC Rule 14e-3 imposes liability based on a parity of information approach. Mr. Cuban’s trading of Mamma.com stock was related to a prospective PIPE transaction, clearly not involving a tender offer.
Accordingly, the SEC was constrained by U.S. Supreme Court precedent to establish that Mr. Cuban “misappropriated” the allegedly material and non- public information he received from Mr. Fauré and Mr. Owen and thereupon sold his Mamma.com stock. As held by the Supreme Court, one who breaches a fiduciary duty or a relationship of trust and confidence to the source of the information engages in such misappropriation. Seeking to expand the con- tours of the misappropriation theory, the SEC adopted Rule 10b5-2 whereby one is deemed to breach such a duty of trust and confidence by trading the subject securities after agreeing to maintain the confidentiality of the material and nonpublic information. The SEC sought to invoke this rationale against Mr. Cuban.
Nonetheless, the question arises how an oral or written confidentiality agreement becomes a litmus test for the recognition of a relationship of trust and confidence. Indeed, parties customarily enter into non-disclosure agreements because they deal at arms-length and do not trust one another. To elevate a non-disclosure agreement to the status of constituting a relationship of trust and confidence between the contracting parties belies economic reality. Noncompliance with such an agreement may well constitute a breach of contract; but a contractual breach is distinctly different from fiduciary transgression. The SEC thus is in a “pickle;” yet, the lower federal courts at present, as illustrated by the Fifth Circuit’s decision in SEC v. Cuban, are accommodating the Commission by permitting these allegedly contractual breaches to state a viable claim under the misappropriation theory.
All of this points to the unacceptable status of U.S. insider trading law. The insider trading parameters in developed markets elsewhere are far more straightforward and protective of market integrity—namely, if one knowingly receives or has unequal access to material and nonpublic information regarding a subject company or the market for its securities, one cannot trade such securities until such information is adequately disseminated to the investing public. The SEC-Cuban saga thus poignantly illustrates the deficient U.S. insider trading framework.