© 2013 The Texas Lawbook.
EDITORS NOTE: The Texas Lawbook provided extensive coverage of the trial. For previous articles about the case, please scroll down.
By Natalie Posgate and Mark Curriden, JD
Staff Writers for The Texas Lawbook
(October 16) – Mark Cuban and a dozen members of legal team crowded into the elevator on the 15th floor of the federal courthouse in Dallas Wednesday about 2:40 p.m.
Everyone, including Cuban’s general counsel Robert Hart, was quiet but smiling. Finally, Tom Melsheimer broke the silence.
“Fuck Yes!” he shouted. The group erupted in cheers, which echoed loudly inside the steel chamber.
Just minutes earlier, a federal jury handed Cuban a slam dunk victory in the insider trading case brought against him by the U.S. Securities and Exchange Commission.
The nine-member jury deliberated less than four hours before finding that the Dallas Mavericks owner violated no securities laws in 2004 when he sold 600,000 shares of Mamma.com stock after being informed by the CEO that the company planned to conduct a private equity offering.
“The first thing I have to do is call my wife and talk to my mom,” Cuban said in the courtroom as he hugged every member of his legal defense team, which counted more than dozen.
Lawyers familiar with the case estimate that Cuban spent more than $8 million fighting the SEC during the past nine years, which is four times the maximum amount of money the agency could have fined Cuban if it had proven its allegations.
Legal experts are divided over the long term impact the decision will have on future SEC enforcement actions, but they agree that the Cuban case is the most expensive individual insider case the SEC has ever taken to trial.
Cuban was cool, calm and collected on the witness stand during the trial. Outside the courthouse, he was blunt in his criticism of the SEC.
“Their lawyers came up to me after the trial and said it was just business and not personal,” he said. “They’re wrong. It is personal. They lied about me and they lied about Charlie and that’s not right.
“The SEC tried to pull a fraud on America and thankfully I live in a country where juries can decide these kind of cases,” he said.
Lawyers for the SEC declined to comment as they exited the courtroom.
Because the lawsuit is a civil case and not a criminal offense, the SEC has the right to appeal the verdict or seek a new trial. However, an SEC lawyer said Wednesday that such an effort is unlikely.
“This fight has been going on for nine years and has cost both sides several million dollars,” said senior SEC official, who spoke on the condition that he not be identified. “The jury has spoken and I think the team believes it is time to move on.”
John Nester, the SEC’s official spokesman, said in a written statement that the verdict “will not deter us from bringing and trying cases where we believe defendants have violated the federal securities laws.”
The SEC’s case confronted various legal and evidentiary problems throughout the litigation.
One of the agency’s initial lawyers in the case was fired after he criticized Cuban in an email for supporting political opponents of the Bush Administration. In 2009, U.S. District Judge Sidney Fitzwater tossed the case citing a lack of evidence, only to have the federal appeals court reinstate the lawsuit contending that it should be decided by a jury.
At trial, the SEC was hit with two additional obstacles. Judge Fitzwater required the government to prove that the information Cuban received was non-public, that he knowingly recognized that the information was confidential and that he agreed to refrain from selling his six percent ownership in Mamma.com based on the information, which SEC lawyers claimed was an unfairly high burden.
The SEC relied on former Mamma.com CEO Guy Fauré as its key witness. Fauré claimed that he told Cuban during an eight-minute phone conversation on June 28, 2004, that he had confidential information to share.
Fauré claimed that Cuban responded, “Uh-huh, okay, go ahead.”
The Mamma.com executive said that he proceeded to tell Cuban that the company planned to conduct a private investment placement in public equity offering. He said that Cuban became very angry during the conversation, realizing the PIPE would dilute the value of his stock.
Fauré claimed that Cuban ended the call by stating, “Well, now I’m screwed. I can’t sell.”
But Fauré also ended up being one of the SEC’s being problems at trial. He is Canadian and refused to travel to the United States to testify, leaving the SEC to play a pre-recorded video deposition in which their star witness came across as suspect.
Defense lawyers were able to exploit Fauré’s absence by claiming that he repeatedly changed his testimony, that he had ulterior motives to make up testimony against Cuban and that the real reason he refused to testify in person was because he didn’t want to face a tough cross-examination by Cuban’s lawyers.
“I don’t think the SEC was ever even in the hunt,” said Tom Melsheimer, a partner at Fish & Richardson who represented Cuban during the trial. “We won 100 to nothing.”
Arnold Spencer, a former federal prosecutor and partner at Akin Gump in Dallas, said the case will not deter the SEC in future high profile cases.
“Their mission is to protect investors, and in many ways, they carry out their mission when they bring these close cases,” Spencer said. “There is no doubt in my mind that the SEC will continue to vigorously enforce these insider trading laws.”
But, he added, “they may hesitate to bring a case when their key witness cannot be subpoenaed to appear in person.”
Former SEC prosecutor Jeff Ansley disagreed.
“The SEC, like any federal agency, is very concerned about both public perception and what it characterizes as the ‘litigation risk’ inherent in all of its cases,” said Ansley, who is a partner at Bell Nunnally & Martin.
“That litigation risk, and the SEC’s concern about what another high-profile failure would do to its reputation, is certain to have a visible impact on both the cases the SEC brings and, for those it does, the terms on which it is willing to settle them,” he said.
Cuban said Wednesday that he is glad that he had the financial resources available to battle the SEC – a fight he said was for “truth and justice.”
“It’s not like winning the Mavs championship because I won nothing today,” Cuban told reporters. “
Jury Rules in Favor of Mark Cuban
By Natalie Posgate and Mark Curriden
Staff Writers for The Texas Lawbook
(October 16) — After nearly three and a half hours of deliberation, nine jurors found Dallas billionaire Mark Cuban innocent of insider trading Wednesday afternoon.
The Wednesday afternoon verdict marks the end of the three-week trial, just days before the federal courts will run out of cash if the government shutdown continues. The six-year legal battle is likely the most expensive case the SEC has ever taken to trial.
The heart of the dispute dates back to 2004 when Cuban had an eight-minute phone conversation with Mamma.com CEO Guy Fauré. During the call, Fauré asked Cuban if he wanted to participate in a private placement investment the company was conducting to raise capital.
During a recorded video deposition, Fauré testified he began the conversation saying, “Mark, I’ve got confidential information,” to which Fauré said Cuban replied, “Uh-huh, okay, go ahead.”
Cuban testified he doesn’t recall anything from the conversation except that he was angry. Fauré said in his deposition that at the end of the call, Cuban said, “Well, now I’m screwed. I can’t sell.” The infamous statement was a key piece of the SEC’s argument that Cuban recognized that the information he received was confidential and that he could not trade on it until after it went public.
Throughout the trial, Cuban denied that the information he received was confidential, that he agreed to keep it confidential and that he agreed to restrict trading.
SEC and Cuban Team Close Strong
By Natalie Posgate and Mark Curriden
Staff Writers for The Texas Lawbook
(October 15) – The U.S. Securities and Exchange Commission told a federal jury Tuesday that Mark Cuban knew he violated securities laws when he traded his six percent stake in Mamma.com in 2004 after learning nonpublic information from the company’s CEO.
“He knew he was screwed,” Jan Folena, the SEC’s lead lawyer, said during closing arguments. “He knew he couldn’t sell, but he sold anyway. That is insider trading.”
But Tom Melsheimer, one of Cuban’s lead attorneys, told jurors that the SEC’s entire case is built on misleading comments, character attacks and efforts to hide the ball. He said the entire case is the federal government run amuck.
“Not even Mark Cuban has the power to make the government stop,” Melsheimer told jurors. “Not even Mark Cuban can make the government admit it is wrong. Only you, the jury, have that power.
“Standing up to the government is not easy,” he continued, “but tell the government enough is enough.”
Three hours of closing arguments filled most of day eight in the SEC’s trial against Cuban. The nine-person jury – seven women and two men — will start deliberating Wednesday morning. A tenth juror was dismissed because of illness.
While it is impossible to accurately predict how long any jury will deliberate, most attorneys in the case expect a decision Wednesday afternoon.
The federal regulatory agency claims that Cuban knowingly received confidential information that Mamma.com planned to conduct a private investment placement equity offering and violated his agreement to not trade based on that information.
Cuban counters that the information about the PIPE was already public, that he never agreed that the information was confidential and that he never agreed that he wouldn’t sell his stock in Mamma.com based on the information.
The entire case boils down to the credibility of two witnesses: former Mamma.com CEO Guy Fauré and Cuban.
Fauré, who testified by a prerecorded video deposition, claimed that he told Cuban during an eight-minute telephone call on June 28, 2004, that he had confidential information to tell. Fauré said that Cuban responded, “Okay, uh-huh, go ahead.”
Fauré said that Cuban became angry and, at the end of the conversation, said, “Well, now I’m screwed. I can’t sell.”
Melsheimer told jurors that “Fauré’s testimony is not credible” and that he proved that by refusing to come to Dallas to testify in person for the trial. He told jurors that Fauré didn’t mention the incriminating portions of his conversation with Cuban during his first couple interviews with the SEC and that he only recalled Cuban’s comments after the SEC ended its investigation into Mamma.com and Fauré.
“We offered to buy him a plane ticket on a direct flight from Montreal to Dallas,” Melsheimer said. “Unlike Mr. Cuban, Guy Fauré didn’t want you to look him in the eye.”
By contrast, Melsheimer told jurors that Cuban “got on the witness stand and answered all the government’s questions.” He said during Cuban’s testimony he said he never does oral confidentiality agreements, which was never refuted by the SEC.
“She can say that – ‘Now I’m screwed. I can’t sell’ – until the cows come home, but the only witness who looked you in the eye said it wasn’t true,” Melsheimer said.
But Folena said that Cuban’s lawyers unfairly and improperly maligned Fauré.
“The judge is going to instruct you that you cannot view Mr. Fauré’s testimony any differently than you do Mr. Cuban’s,” she said. “Think to yourself, if a billionaire has his non-profit organization investigate you and track you, are you going to come to the United States to testify?
“The information that Mark Cuban had was not available to anyone else and it was information he agreed not to trade on,” Folena concluded. “That’s insider trading.”
After closing arguments, U.S. District Chief Judge Sidney Fitzwater delivered the charge to the jury. He told jurors that they must decide whether seven elements of the SEC’s claims are true are not:
1. Cuban received material, nonpublic information from Mamma.com concerning its impending PIPE transaction
2. Cuban expressly or implicitly agreed to keep the PIPE information confidential and to not trade on it
3. Cuban traded because of the PIPE
4. Before trading on the PIPE, Cuban did not fully disclose to Mamma.com that he planned to trade on the information
5. Cuban acted knowingly or with severe recklessness
6. Cuban’s conduct was in connection with the sale of a security
7. Cuban used a means of interstate commerce in connection with the sale of the securities (mail, telephone, email)
SEC: Cuban Knew He Couldn’t Sell
By Natalie Posgate
Staff Writer for The Texas Lawbook
(October 15) — The Securities and Exchange Commission urged a federal jury Tuesday during closing arguments that Mark Cuban knew he did wrong when he traded his 6 percent stake in Mamma.com after learning material, nonpublic information from the company’s CEO.
“We’re going to end this trial right where we started it: with the words of Mark Cuban,” said SEC attorney Jan Folena, alluding to the famous line of the trial, ‘Now I’m screwed, I can’t sell’ that Cuban allegedly said during an eight-minute phone conversation in 2004 with Mamma.com CEO Guy Fauré, who was the SEC’s star witness.
“Mr. Cuban knew he was screwed, he knew he couldn’t sell, but he did anyway. That’s intentional conduct,” Folena added.
The closing arguments occurred during the third and final week of Cuban’s insider trading trial against the SEC. After the defense delivers its closing argument, the SEC will have 30 minutes of rebuttal time. After that, Chief U.S. District Judge Sidney Fitzwater will deliver the charge to the jury.
Folena laid out seven elements during her hour and a half closing argument that the government had to prove for the jury to find Cuban guilty of insider trading:
• Cuban received material, nonpublic information from Mamma.com concerning the PIPE
• Cuban agreed to keep the PIPE information confidential and not to trade on it
• Cuban sold his shares because of the PIPE (even if one of the many reasons)
• Before trading on the material, nonpublic information, Cuban did not fully disclose that he planned to trade on that material, nonpublic information.
• Cuban traded with intent
• Cuban’s conduct was in connection with the sale of his security
• Cuban used facilities of national securities of exchange to make his trade – i.e. mail, telephone or email.
She perhaps spent the most time on her first point because it’s exactly what Cuban’s expert witness Dr. Erik Sirri spent a day and a half trying to counter when he testified earlier in the trial that the Mamma.com private placement information was already public by the time Cuban traded on it.
The defense has argued throughout the trial that the information the self-made billionaire received was not confidential, that Cuban made no commitment to keep it confidential and that he made no agreement to not sell based on the information he received.
More details as the story develops.
Mark Cuban: Meet Barry Switzer, but No Sunbathing Please
By Mark Curriden, JD
Senior Writer for The Texas Lawbook
(October 13) – Mark Cuban has never met Barry Switzer, but the Dallas Mavericks owner hopes his battle with the U.S. Securities and Exchange Commission has a similar ending to the fight the former Oklahoma Sooners coach had three decades ago.
In 1983, the SEC accused the three-time NCAA championship football coach of insider trading. The federal government claimed Switzer received confidential information and then traded stocks based on that information for his own financial benefit.
The entire case, according to court records and lawyers involved in the matter 30 years ago, came down to the believability of Switzer’s testimony. Many legal experts believe the SEC’s ongoing insider trading trial against Cuban rests on whether jurors believe the Dallas billionaire when he was on the witness stand last week.
“The similarities between the two cases – factually and legally – are striking,” says former SEC senior lawyer Jeff Ansley, who is now an attorney at Bell Nunnally & Martin in Dallas.
The SEC claims Cuban received confidential information about Mamma.com and then sold more than 600,000 shares of his stock the day before the company publicly announced it was conducting a private stock offering, which would have diluted the value of Cuban’s shares by about $750,000.
The trial, which enters day eight on Tuesday, is expected to conclude this week.
Very few SEC prosecutions of high-profile defendants ever make it to trial because those individuals are either guilty and decide to cut a deal or negotiate a settlement because it is cheaper than paying the legal fees to fight such charges.
But Switzer – and now Cuban – are different.
“There are definitely parallels in the two cases,” says Jason Ross, a white-collar criminal defense lawyer at Dykema. “Both defendants are sports celebrities. Neither worried about the legal fees. In both cases, the SEC was applying the insider trading laws aggressively in ways they haven’t done previously.
“And both cases relied on whether you believed the defendant,” says Ross.
Harry Woods, an Oklahoma City lawyer who represented a co-defendant in the Switzer case, says the SEC brought the Switzer case because it was so high profile.
“The SEC wanted to make an example of Barry Switzer and show that they were not afraid to bring a case against a popular individual, which may be what is happening to Mr. Cuban,” says Woods.
The facts in the Switzer case are, in the words of several legal experts, bizarre and highly suspect.
In 1981, Switzer was attending a track meet at John Jacobs Field in Norman when he met a friend, Oklahoma oilman George Platt, and his wife. Platt was on the board of directors of Phoenix Resources, an independent oil and gas company that sponsored Switzer’s weekly radio show called “Play Back.”
Switzer had previously signed several autographs for Platt and agreed to consider upgrading Platts’ season tickets for Sooner football games.
According to Switzer’s testimony, he walked around the stadium meeting a few hundred supporters, but needed to rest during a long afternoon break in the track meet.
Switzer testified that he “laid down on the bleachers behind the Platts to sunbathe,” according to court records.
As the football coach lay there, he overheard Platt telling his wife that he needed to return to New York because Phoenix was planning to hire the investment firm Morgan Stanley to conduct a liquidation of the company the next week.
Switzer said he did not discuss the matter directly with Platt and that Platt “was not conscious of Switzer’s presence on the bleachers behind him, nor that Switzer had overheard any of the conversation,” court records show.
The next day, Switzer informed two friends about the information and together they purchased tens-of-thousands of shares of Phoenix stock, which they sold days later, pocketing about $600,000.
The SEC’s lead lawyer at the time, Christopher Browne, described Switzer’s story as “outrageously unbelievable” and “cannot withstand close scrutiny.”
Browne, who later became head of the SEC’s Fort Worth Regional Office, argued that Switzer and Platt were involved in a “complex scheme of fraud.”
“Barry Switzer took the witness stand and he told the judge his story in a sincere and convincing manner,” says Woods. “It didn’t matter that his story was outrageous, because the SEC had no evidence and no witnesses disputing Switzer.”
The federal judge ruled in favor of Switzer, citing his testimony as irrefutable.
“Everyone can probably agree that there wasn’t a whole lot of truth in Switzer’s story, but it was Oklahoma in the 1980s, Switzer was incredibly popular and the SEC couldn’t shake his testimony on the witness stand or prove that he was lying,” says Ansley.
Brad Foster, a securities litigator at Andrews Kurth in Dallas, actually wrote about the similarities between the Switzer and Cuban cases in 2008. He pointed out that Switzer’s victory 30 years ago may have impacted the SEC’s investigation into Cuban. (Here is a link to that article: http://www.andrewskurth.com/pressroom-publications-592.html).
“Most people would be surprised to learn that Switzer’s sunbathing story would constitute a defense to insider trading,” Foster wrote. “It’s true, though. Not everyone who has inside information is prohibited from making trades.
“Corporate insiders can’t trade, and neither can outside professionals who have a fiduciary duty to the company,” he said. “Likewise, if a corporate insider gives a friend an illicit tip, both of them can be held liable.
“But if you overhear a private conversation in an elevator, on an airplane, or even sunbathing, you are free to trade away,” Foster said.
Legal experts, including Foster, are quick to point out that there are some key differences in the Cuban and Switzer cases.
“The SEC didn’t have Switzer’s email or blog postings and it didn’t have a company official claiming Switzer acknowledged he was receiving insider information,” says Arnold Spencer, a former federal prosecutor and now a lawyer at Akin Gump in Dallas.
Spencer is referring to the video recorded deposition of former Mamma.com CEO Guy Fauré who claims he told Cuban in a phone call the information he was about to provide him about the private stock offering was confidential and that Cuban agreed he could not trade based on the information – testimony that Cuban strongly denies.
“There’s much more documentary evidence in the Cuban case,” says Spencer. “But at the end of the day, yes, it probably still comes down to whether the jurors believe Mark Cuban.”
Former SEC Official: Mamma.com Financial Info Not Confidential — Updated
By Natalie Posgate
Staff Writer for The Texas Lawbook
(October 9) – A former high-ranking official at the U.S. Securities and Exchange Commission testified Wednesday that information about Mamma.com’s supposedly confidential private securities offering was in the public domain weeks before a company executive provided the details to Mark Cuban in June 2004.
Dr. Erik Sirri, the director of the SEC’s Division of Trading and Markets from 2006 to 2009, told jurors that documents show that many potential investors knew that Mamma.com planned to sell additional shares in the company and that they were not restricted in their stock trading capabilities.
Sirri, now a finance professor at Babson College in Boston, is a paid expert witness for Cuban’s defense. He said that he is being paid $900 an hour for his work – a total price tag that has exceeded $120,000 so far, including $4,500 for his testimony today.
The SEC accuses Cuban of knowingly receiving confidential insider financial information from Mamma.com CEO Guy Fauré on June 28, 2004, and then violating his agreement to not trade based on the information when he sold 600,000 shares of the company the very next day, avoiding a $750,000 loss.
Cuban denies the information he received was confidential and says he never agreed to not sell his six percent ownership in Mamma.com when he was told about the Internet company’s private stock offering.
As an expert witness, Sirri walked jurors through a path of Internet website postings, emails, SEC records and even prior testimony in the Cuban trial to show how the financial information was publicly available and well known.
“People who wanted access to that information could get it,” Sirri, who also served as the SEC’s chief economist from 1996 to 1999, told jurors.
Sirri pointed to an April 1, 2004 message board posting on Yahoo.com.
“ALL SHOULD READ!!!!” the message board alerted. “Private Placement coming imminent… I know an insider, dilution will take place to fund the acquisition, stock could come correct strong when news comes up.”
The expert witness directed jurors to Mamma.com’s own May 27, 2004, financial filing with the SEC that included the company’s engagement letter with Merriman Curhan & Ford, a financial broker that conducts private investments in public equities, also known as PIPEs.
“Personal and Confidential” are marked on the top left hand corner of the document, which the SEC promptly uploaded on its EDGAR database.
Once it’s there, Sirri said, “anyone in the world can see this when they get on EDGAR.”
Christopher Clark, one of Cuban’s lawyers, asked Sirri if the document states that Mamma.com is doing a private securities offering.
Sirri: Certainly, it’s something they’re considering.
Clark: Does this Form 20-F say a PIPE is definitely going to happen?
Sirri: No, it does not.
Sirri has testified as an expert witness in court cases more than 40 times. He has testified before the U.S. Congress 12 or 14 times. He also served on the board of directors for the Boston Stock Exchange and on the economic advisory board for NASDAQ.
After examining trial testimony of Merriman investment banker Arnold Owen and its former general counsel, Christopher Aguilar, Sirri told jurors that there were no restrictions placed on the information about the PIPE and that there were no confidentiality agreements prohibiting traders from discussing or trading on the PIPE details.
Sirri told jurors trading in Mamma.com stocks spiked 1,932 percent on June 28 after Sage Capital, the lead investor in the PIPE, emailed a proposed term sheet to Merriman about the private offering. The reason, according to Sirri, is the document was not marked as confidential.
Cuban didn’t trade his stock until the next day.
During cross-examination, SEC lawyer Christian Shultz tried to taint Sirri’s testimony by asking him whether he had seen Owen and Aguilar’s entire testimony. One part that Sirri had not seen from Aguilar’s stated Aguilar sent out an acknowledgement letter on June 14, 2004 to the PIPE investors that cited an SEC position about PIPE information being considered material, nonpublic information. The letter also included a statement that warns the investors of potential trading restrictions that they could face for the PIPE.
Schultz also tried to challenge Sirri’s credibility by pointing out that Sirri hadn’t spoken to any of Cuban’s witnesses for his research and the fact that Sirri did not study which individuals actually traded during the trading spike that occurred June 28.
Sirri argued that specific information, under his understanding, was not available.
Defense lawyers started Wednesday by playing jurors a brief video deposition of SEC enforcement lawyer Alton Turner, who interviewed Cuban in 2004 when the federal government was investigating allegations of stock manipulation at Mamma.com. This was three years prior to the SEC turning its focus on the Dallas Mavericks owner.
Turner testified that Cuban cooperated fully without a lawyer and even voluntarily sent him emails related to his sale of 600,000 shares of Mamma.com stock.
There will be no trial proceedings Thursday or Friday, as U.S. District Chief Judge Sidney Fitzwater has a criminal docket that constitutionally requires priority. Monday is Columbus Day and the court will be closed. The remaining testimony, the charge and oral arguments are expected to be completed Tuesday.
Cuban’s Long-time Stockbroker Takes the Witness Stand
By Natalie Posgate
Staff Writer for The Texas Lawbook
(October 8) –Mark Cuban’s long-time stockbroker told a federal court jury Tuesday that corporate compliance officials at UBS Financial Services raised no red flags or concerns about the legality of Cuban’s sale of Mamma.com stock in 2004.
But lawyers for the U.S. Securities and Exchange Commission, in a series of heated exchanges with the Dallas-based investment broker, attempted to undermine the witness’ credibility by showing his financial dependency on Cuban.
Charlie McKinney, who has handled more than 40,000 stock trades for Cuban during the past 16 years, testified that the Dallas Mavericks owner sent him an email on June 30 – one day after selling 600,000 shares of Mamma.com stock – asking if the trade was legally okay.
“I wanted to make sure I was 100 pct kosher on that trade,” Cuban said in the email to McKinney, who was then a senior vice president at UBS and is now a director at Credit Suisse Group AG in Dallas. “Can you check with your folks to make sure all is cool?”
McKinney forwarded the email to the firm’s corporate compliance department, which he said would have gotten back to him if there had been a problem.
“If compliance found something wrong, they would have let me know,” McKinney told jurors. “And they didn’t.”
The testimony came in day six of the U.S. Securities and Exchange Commission’s insider trading trial against Cuban. The government accused the billionaire of knowingly obtaining confidential financial information about Mamma.com, agreeing to not trade his stock based on the information and then violating that agreement.
The SEC claims that Cuban avoided about $750,000 in losses when he sold his six percent ownership stake in the Canadian Internet company just prior to the company announcing that it planned a private securities offering – a move that diluted the value of shares of the company’s stock already owned by Cuban and others.
Lawyers for the SEC say the email shows that Cuban knew there were problems with his trade, while defense attorneys say it demonstrates their client’s concerns with due diligence.
Duane Thompson, a lawyer for the SEC, grilled McKinney under cross-examination as a witness who owed much of his financial success to Cuban and was unlikely to say anything incriminating about the man for whom he manages about $695 million.
Thompson: “Do you think you would still be his broker if you said he insider traded [today]?”
McKinney: “I don’t know what he would do.”
Thompson told McKinney that it wasn’t something the broker wanted to put to the test.
McKinney: “That’s incorrect. If I thought that, I’d tell the truth, sir.”
Thompson: “He’s (Cuban) never winked and nodded and said something like that (to not respond to the email)?”
McKinney: “No, that’s ridiculous.”
Thompson showed the witness a previous video deposition taken two years ago when McKinney was asked the same question. His response: “I don’t remember.”
McKinney told jurors that he wished he had seen Mamma.com’s SEC filing from May 2004 – available on the SEC website a month before Cuban heard about it from Mamma.com CEO Guy Fauré – that included plans to conduct a private placement because he knew Cuban didn’t like those kinds of investments.
If UBS officials had determined there was a problem with Cuban’s decision to sell the shares, they would have contacted Cuban’s lawyers to unwind the trade.
McKinney said he’s never seen Cuban do anything improper to avoid a loss, adding that Cuban’s trading habits are extremely conservative.
Jurors also heard the video recorded deposition of former Mamma.com CFO David Bertrand, who testified in French with a translator. He provided fodder for both sides in the case.
Bertrand testified that company leaders agreed to invite Cuban, who was Mamma.com’s largest shareholder, to participate in the private stock offering. He stated, however, that there was never a discussion to have Cuban sign the company’s non-disclosure agreement, which he said was used with any third party receiving insider financial information.
In addition, Bertrand testified that he was unaware of any effort to get Cuban to agree to not sell his stock based on the financial information that Fauré shared with Cuban.
But Bertrand also said that no one else outside of the company was informed of the private stock offering and that the information was confidential.
The defense also called to the stand former general counsel Christopher Aguilar of Merriman Curhan & Ford, the investment bank that advised Mamma.com with its private placement transaction.
Aguilar testified that he found no non-disclosure agreements or non-trade agreements between Merriman and potential investors of the Mamma.com private placement, nor did he find no agreements of the same kind between Merriman and Cuban. He was prompted to look for such agreements after the SEC contacted him in December 2006 to forward all information regarding the Mamma.com private placement.
However, employees at Merriman considered private placement information confidential and were restricted on trading with it, Aguilar said.
Employees at Cranshire Capital, one of the investors of the Mamma.com PIPE, also were restricted from trading on the information, said the company’s president Mitchell Kopin, who also testified in court Tuesday.
Although Kopin didn’t remember Mamma.com officials request that he restrict his trade, he said he developed this internal policy for Cranshire because “nobody knew the answer” to whether it was legal for investors and other parties to trade on information related to upcoming private placement transactions.
“It’s a gray area with the SEC,” he said.
Cuban: I Had Concerns About Mamma.com’s Ties to Stock Swindler
By Natalie Posgate and Mark Curriden
Staff Writers for The Texas Lawbook
(October 7) – Mark Cuban said Monday that he never consents to oral confidential agreements and that he bluntly told Mamma.com officials and their financial advisors that he would sell his stock in the company if Mamma.com conducted a private equity offering in 2004.
On the witness stand for the second day, Cuban restated his testimony from last week that he made no agreement to keep information provided to him confidential and that he never agreed to not sell his stock based on the information, which are key elements the government must prove to win its insider trading case against the Dallas Mavericks owner.
“I’m not going to agree to keep something confidential when I had no idea what the subject was,” Cuban testified. “I don’t do oral confidentiality agreements.”
Cuban told jurors Monday that he had growing concerns about Mamma.com starting in March 2004.
“I was doing some homework and I saw on a Yahoo message board that there was a connection between this convicted stock swindler and Mamma.com,” Cuban told jurors.
A few weeks later, in April 2004, an FBI agent contacted Cuban, informing him that the federal government was investigating the relationship between the Canadian Internet company and one of its board members and Irving Kott, a stock broker who later pleaded guilty to fraud charges.
The Dallas billionaire says he immediately confronted Mamma.com executives about the connection.
“My getting a call from the FBI was more than a little bit unsettling,” he wrote in an email to Mamma.com officials.
“They told me that they didn’t know who the guy is, but [later admitted that] they did know about the relationship,” Cuban said under oath. “They were dealing with crooks. It was a huge red flag for me.”
In a May 1, 2004 email to Mamma.com CEO Guy Fauré, Cuban wrote, “What if I’m not comfortable with him [referring to a board member] having a relationship with Mr. Kott. That is enough for me to dump the stock.”
On June 28, Cuban received an email from an Australian businessman claiming he has a hard copy document proving a link between Kott and the Mamma.com board member. That is the very same day that Fauré and Cuban had their now infamous conversation in which Cuban is alleged to have said, “Well, now I’m screwed. I can’t sell.”
Jurors were presented emails and internal government documents showing that Cuban, on June 30, voluntarily cooperated with the U.S. Securities and Exchange Commission’s subsequent investigation into Mamma.com and Kott.
Cuban’s lawyers claim that the notes taken by the SEC enforcement lawyer interviewing Cuban in 2004 support his testimony today.
Cuban also noted that Fauré sent him an email instructing him to call or have any of his financial advisors call Mamma.com’s financial advisors to discuss the private security offering.
“I was never told it was confidential and I told them I planned to sell my stock,” Cuban said Monday. “I told everyone I planned to sell my stock.”
“What did you do when you hung up the phone?” defense attorney Tom Melsheimer asked.
“Sold my stock,” Cuban answered.
Under examination by lead SEC lawyer Jan Folena, Cuban said he didn’t know back in 2007 whether his broker at UBS, Charles McKinney, had authority to trade his stocks without his permission.
Folena: “Mark Cuban does not know whether Mr. McKinney has discretionary over his account or not?”
Cuban: “Mark Cuban doesn’t know a lot of things, and that’s one of them.”
After Cuban finished testifying, the SEC lawyers announced to Chief U.S. District Judge Sidney Fitzwater that they are finished calling witnesses for the trial. Cuban’s counsel then called McKinney to the stand, who will continue his testimony on Tuesday.
Mark Cuban Back on the Witness Stand Monday
By Natalie Posgate and Mark Curriden
Staff Writers for The Texas Lawbook
(October 6) – The second week of the U.S. Securities and Exchange Commission’s insider trading trial against Mark Cuban is expected to start where it left off Thursday – with the Dallas Maverick’s owner on the witness stand.
The SEC accuses Cuban of knowingly receiving confidential insider information about Canadian Internet search engine company Mamma.com and then violating an agreement to not trade his stock in Mamma.com based on that information.
Cuban told jurors last week that he never agreed to not sell his shares in the company.
Lawyers following the case say the only surprise so far is the lack of surprises or revelations that have come from Cuban and other witnesses.
Cuban is expected to remain on the witness stand most of Monday.
Cuban Takes Witness Stand, Denies He Agreed to Confidentiality
By Natalie Posgate and Jeff Bounds
Staff Writers for The Texas Lawbook
(October 3) – Mark Cuban told jurors Thursday that he became angry when he learned from Mamma.com executives that the company planned to conduct a private securities offering that would dilute his stock, but that he never said he would keep information about the company’s private placement confidential and he never agreed to not trade based on the information.
The Dallas Mavericks owner testified that he has very little memory of the eight-minute conversation he had with Mamma.com CEO Guy Fauré, but he said he knows Fauré’s testimony is false.
“If I agree to do something, I’m going to stick to my word,” he told jurors.
Cuban took the witness stand in the fourth day of his trial. The U.S. Securities and Exchange Commission accuses the self-made billionaire of violating federal insider trading laws.
The government claims former Mamma.com CEO Guy Fauré called Cuban in June 2004 to inform him about the company’s plans to raise capital funds through a private stock offering.
Fauré testified by pre-recorded video Wednesday that he told Cuban in an eight-minute phone conversation that the information was confidential and that Cuban responded that he understood.
At the end of their conversation, Fauré claims Cuban responded, “Well, now I’m screwed. I can’t sell.”
Jan Folena, the SEC’s lead lawyer in the case, called Cuban as its witness, but he didn’t appear to give them much incriminating testimony. The pair alternately joked and sparred with each other for about three and a half hours.
They spent the time arguing over very small details, at one point debating whether Cuban takes “every loss as a huge failure,” as he stated in a magazine article he wrote and that was published earlier this year.
But despite keeping the Dallas Mavericks owner on the stand for a half day, Folena never asked him point blank whether he had illegally profited by trading on confidential information that was material to Mamma.com’s finances.
Cuban’s attorney Tom Melsheimer, on the other hand, asked him that within minutes of beginning the cross-examination. Cuban denied doing so.
“Have you ever made an agreement to restrict your trading in an eight-minute phone call?” Melsheimer asked shortly after that.
“No,” Cuban replied. Why not? “It doesn’t make sense.”
Melsheimer then asked Cuban if he had a pattern when companies approached him about signing non-disclosure agreements.
“I get asked all the time, ‘Mark, we have an investment idea, you’ve got to sign an NDA.’ My answer is always no,” Cuban said, although there are a handful of exceptions.
Surprisingly, neither Folena nor Cuban raised the “now I’m screwed” quote during direct examination, which is at the heart of the government’s case. Folena did point out that Cuban asked an investigative journalist to dig up negative information on Fauré.
She asked Cuban about various emails he sent to friends, journalists and other interested parties when they asked him why he sold all of his Mamma.com shares. She confronted him about why he only responded the PIPE as the reason for selling the stock when he testified that he had other motivations.
Under cross-examination by Melsheimer, Cuban said he was afraid of getting sued for making derogatory remarks about Mamma.com.
Later, Melsheimer asked him the other reasons that led to him selling his shares besides the PIPE.
Cuban replied that he received an offer to join Mamma.com’s board of directors within a matter of days after he purchased the stock in the company – something he said “never happens.” He added that he offered to help promote the company, such as wearing Mamma.com merchandise on television, but executives never followed up.
The trial is expected to last at least through next week. The insider trading allegations are civil charges, not criminal. Legal experts say the maximum possible fine is about $2.5 million.
The trial picks up again Monday. It is likely that the SEC will put Cuban on stand to ask him follow-up questions regarding his testimony with Melsheimer.
SEC’s Key Witness: Cuban ‘Screwed’
By Natalie Posgate and Mark Curriden
Staff Writers for The Texas Lawbook
(October 2) – 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.”
Opening Statements Done, Key Witnesses to Testify Wednesday
(October 2) – The two key witnesses in the U.S. Securities and Exchange Commission’s insider trading case against Mark Cuban are expected to take center stage Wednesday in federal court in Dallas.
The SEC will likely show jurors in the trial the video recorded deposition of its star witness, former Mamma.com CEO Guy Fauré, who claims he provided the Dallas Mavericks owner confidential insider information about the company with the understanding that Cuban would not trade stock based on the information.
But there also is a good chance that Cuban will take the witness stand Wednesday.
Lawyers for the two parties clearly captivated jurors Tuesday in opening statements that combined entertaining storytelling, a bit of courtroom theatrics, citations to the Bible and some educational classroom style lecturing in presenting their respective cases.
The SEC called the Dallas Mavericks owner a cheater. Cuban’s lawyers said the government’s star witness is motivated to lie and cannot be believed.
“Wow, that was pretty good,” one of the jurors told her colleague, who nodded in full agreement.
Neither side wasted time getting to the crux of their cases.
“Now, I’m screwed. I can’t sell,” Jan Folena, the SEC’s lead lawyer told jurors before she even introduced herself. “Those are the words of Mark Cuban, the defendant in this case.”
Folena told jurors the evidence Cuban’s use of those six words would show that he agreed that information provided to him by an executive at Mamma.com about a private securities offering was confidential and that he agreed to not trade based on the information. Despite that agreement, Cuban sold his six percent ownership in the company immediately, she said.
“That is insider trading,” Folena said waving her hands toward the defendant. “Mark Cuban violated the law and he knew better.”
Cuban’s lawyer, prominent Dallas trial lawyer Tom Melsheimer, also came out of the box swinging.
“The truth in this case is not complicated; the truth is Mr. Cuban has done nothing wrong,” the Dallas lawyer told the jury. “The evidence will show that Mr. Cuban never made any agreement to keep information confidential. You will hear him say that.”
Jurors also heard testimony from the first two witnesses. More on that later.
Folena and Melsheimer used their respective hour of opening statements to offer jurors a preview to their cases and developed themes designed to bolster their side of the dispute while undermining the other side’s argument.
“After Folena finished, I thought the SEC had a much stronger case than I had been led to believe, and after Tom finished, I thought Cuban’s case was very strong,” said Kimberly Priest Johnson, a former federal prosecutor in the courtroom Tuesday morning. “But that’s exactly the way I should feel if both sides are good, and they were.”
Johnson said Folena did an excellent job of explaining to jurors why they should care about a case that pits federal securities regulators against a billionaire.
Folena told jurors that Cuban is smart and is extraordinarily driven to be successful, pointing out his ownership of the Dallas Mavericks and other business ventures.
“This trial will show that same determination, that drive to win, that competitive edge that makes him successful is exactly what caused him to break the law in this case,” she said. “Mr. Cuban’s success as a business man is to be admired, but success must only come within bounds of the law.
“Those laws apply to the rich, the poor, the famous and the unknown,” Folena told jurors. “They also apply to Mark Cuban.”
Folena pointed to an email Cuban wrote to then-Mamma.com CEO Guy Fauré on April 23, 2004 stating, “Obviously, what you tell me is confidential.”
The SEC lawyer told jurors that the email is reflective of the relationship between Cuban and Fauré – strictly business.
Then came the eight-minute phone conversation on June 28 in which Fauré claims he allegedly told Cuban, “Mark, I’ve got confidential information to tell you.”
Cuban, according to the SEC’s witness, responded, “Yeah, uh-huh, okay.” When Fauré told about Mamma.com’s plans to offer a private securities offering, Cuban became infuriated because his ownership shares would be diluted and he responded, “Now, I’m screwed. I can’t sell.”
Folena told jurors that statement is all the evidence the SEC needs to prove that Cuban knew there was a confidentiality agreement between them.
“Can that mean anything other than what it says?” Folena asked jurors.
Melsheimer said used most of his hour-long opening statement undermining the SEC’s key witness as unreliable while portraying his client’s actions as pure.
The Fish & Richardson partner told jurors that Fauré changed his story multiple times over the years and was trying to curry favor with the SEC. And he pointed out that Fauré would not be testifying live in the trial, but by video recording.
“Mark Cuban will take the witness stand and will look you in the eye and tell you he never made such a statement and he will tell you why he never made such a statement,” Melsheimer said.
Cuban cooperated fully with the SEC back in 2004, even providing them with emails involving his dealings with Mamma.com and telling them about his decision to sell his stock when he learned about the private stock offering, he said.
Melsheimer pointed jurors to Proverbs 28:1: “The wicked flee when no one pursues, but the righteous are bold as a lion.”
“Use common sense and wisdom,” Melsheimer told jurors. “Does it make any sense for Mr. Cuban to be knowingly involved in a fraudulent scheme if he is talking with the SEC fully without a lawyer? Does that sound like a man who has done something wrong?
“We’re in court today because Mark Cuban is standing up to the government,” he said.
FYI: Folena is by far the smallest person in the courtroom, standing at maybe a little more than 5-feet tall. Of the more than two-dozen lawyers and courtroom personnel, she also was the only person not wearing a dark suit, instead opting for a more colorful striped and contemporary outfit.
The amount of energy she exerts waving her arms while presenting arguments or even sitting in her chair listening to witnesses and nervously playing with her hair reminds us of a young Mark Cuban sitting court-side at a Mavericks game, just aching to jump up out of the seat to object.
“She stood out from everyone else in the courtroom in a very good way,” says Kimberly Priest Johnson, a former prosecutor who was in the courtroom Tuesday. “She appeared strong but not too strong. I think she came across as someone jurors could trust.”
Folena also played the role of teacher, explaining to jurors the role of the SEC and why they should care about the case. It is clear she has an excellent grasp of the evidence in her case, though I get the idea that she wishes the evidence were a little stronger for her team’s side.
By contrast, Tom Melsheimer is tall, his voice is strong and commanding, and he has much less hair. He comes across as extremely confident in his case. It doesn’t hurt that the guy sitting next to him, Cuban, is paying him about $1,000 an hour.
Melsheimer appeared to get bonus points with some jurors when he cited Proverbs 28:1. An old very successful trial lawyer once said you always score with jurors when you quote your mother or the Bible.
The first person to testify in the case was David Goldman by video deposition from October 2011. Goldman was the chairman of Mamma.com at the time Cuban sold his shares. Some key facts he said were:
- Fauré never told Goldman that he secured a nondisclosure agreement with Cuban when they discussed the PIPE offering.
- Goldman said he didn’t consider Cuban an insider of Mamma.com. Before Fauré called Cuban on June 28, 2004, none of the company executives had disclosed financial information to Cuban.
- There was a document signed by both Goldman and Fauré in June 2004 that listed out pros and cons of doing a PIPE. One of the cons was that their largest shareholder, Mark Cuban, expressed general aversion toward PIPE transactions.
- Executives at Mamma.com regarded the PIPE as confidential information and company executives were restricted of making any securities trades before the deal closed.
- Mamma.com did not discuss the PIPE with anyone outside the company because it was considered material information. The exceptions are Cuban and one potential investor who met with both Goldman and Fauré.
- Goldman and Fauré had reservations about talking to Cuban about the PIPE since he had publicly expressed his dislike of PIPEs, but agreed they needed to approach him because his equity would drop below 5 percent after the PIPE offering.
- Cuban informed Fauré in their conversation that he would sell his shares, but they did not know that it would be before the deal closed.
- Cuban filed his securities trade with the SEC, which is when Goldman found out about the transaction.
Arnold Owen testified next and was the first live witness in the trial. Owen was previously the managing director of private placement Merriman Curhan & Ford, the investment bank that advised Mamma.com for the PIPE. He was the person who gave Cuban more information about the PIPE after learning about it from Fauré.
Duane Thompson examined Owen for the SEC and Chris Clark cross-examined him.
During the SEC’s examination, Owen said he didn’t remember the substance of the call with Cuban, but he remembered that Cuban as upset. He said this made him uncomfortable because “it’s Mark Cuban. He’s a very famous person.”
Thompson then asked Owen about his testimony that he gave to the SEC in November 2007 when it opened its investigation on Cuban. He said he doesn’t remember now what he said in 2007. In that testimony, when the SEC asked Owen if he remembered if he told Cuban during their phone call that the PIPE was to be announced the next day, he answered, “That’s the intent of the call.”
Clark didn’t get far into his cross-examination before the jury was dismissed for the day. But he did find this out from Owen: there was no confidentiality agreement established on a June 18, 2004 term sheet for the PIPE offering between Mamma.com the lead PIPE investor, Sage Capital.
Cuban’s counsel will continue cross-examining Owen tomorrow morning. Also scheduled to testify are investor Mitch Levine; the SEC’s key witness, former Mamma.com CEO Guy Fauré, by video deposition; and lastly, Mr. Cuban.
Jury Selected to Decide Insider Trading Trial
By Natalie Posgate
Staff Writer for The Texas Lawbook
(September 30) – After a tedious day of questioning, seven women and three men were chosen as jurors Monday to decide the federal government’s insider trading case against Mark Cuban.
The 10-person jury includes a homemaker, teacher, legal secretary, realtor and government contractor. All of the jurors said they were familiar with Cuban through his appearances on TV’s Shark Tank, his leadership of the NBA team or his various business ventures.
None of the jurors are Dallas Mavericks season ticket holders, regular viewers of the TV show or have had previous conflicts with the U.S. Securities and Exchange Commission.
Lawyers for the SEC and Cuban are scheduled to make opening statements Tuesday in a trial that is expected to last about three weeks.
Many of the original 64 potential jurors were dismissed due to hardships that a three-week trial would cause them and their families. Lawyers for the SEC asked jurors if they felt an oral commitment over the phone was as meaningful as a written contract.
The SEC’s case against Cuban hinges on an eight-minute phone conversation between Mamma.com former CEO Guy Fauré and Cuban. The SEC claims Fauré provided Cuban insider information about the company’s plan for a private securities offering to raise capital and that Cuban agreed that he would not sell his stock in the company based on that information.
Cuban sold his six percent ownership in the Canadian web search company the next day and avoided about $750,000 in financial losses.
The Dallas billionaire says the information he received wasn’t confidential, that he made no commitment to keep it confidential and that he made no agreement to not sell based on the information he received.
Jury De-Selection Monday in Insider Trading Trial
By Natalie Posgate and Mark Curriden
Staff Writers for The Texas Lawbook
(September 29) – There are lots of people who love or hate Mark Cuban.
None of them are likely to serve on the 10-person jury being selected Monday to decide if the federal government’s accusations that the Dallas Mavericks owner violated insider trading laws have any merit.
Lawyers for the U.S. Securities and Exchange Commission and Cuban plan to use jury selection more like jury de-selection to remove prospective jurors who are so pro or con Cuban that they are unlikely to be fair and unbiased in the case.
Because of Cuban’s celebrity status, legal experts say that the few hours U.S. District Chief Judge Sidney Fitzwater and the lawyers spend Monday morning questioning potential jurors will have a much greater impact on the outcome of the case than jury selection has in most trials.
“There are cases that are won or lost in jury selection and this very well could be one of those cases,” says Arnold Spencer, a former federal prosecutor and now a partner at Akin Gump.
The SEC alleges that its star witness, Mamma.com former CEO Guy Fauré, provided Cuban insider information about the company’s plan for a private securities offering to raise capital. Fauré says that the Dallas billionaire, angry that it would dilute the value of his stake, responded, “Well, now I’m screwed. I can’t sell.”
Despite this, the SEC claims Cuban still sold his six percent ownership in the Canadian web search company and avoided about $750,000 in financial losses.
Cuban says the SEC is wrong on both the facts and the law. He says the information he received wasn’t confidential, that he made no commitment to keep it confidential and that he made no agreement to not sell based on the information he received – three elements Judge Fitzwater has ruled the SEC must prove before it can win its case.
The battle between the SEC and Cuban has finally reached the trial stage after more than six years of legal wrangling and millions of dollars spent by both sides.
Both sides have spent a sizeable chunk of cash on professional jury consultants who are advising the lawyers on juror attitudes and alerting them to possible red flags signaling how a juror might be leaning. Lawyers in both camps have reportedly conducted mock juries to test themes or legal arguments that play positively and negatively with potential jurors.
“This is a classic credibility case for jurors to weigh who is telling the truth – Cuban or Fauré,” says Haynes and Boone partner Ron Breaux, who specializes in securities litigation. “That makes jury selection so very important here.”
Breaux and other legal experts say that the SEC will seek to identify and disqualify prospective jurors who are enamored with Cuban because he’s a self-made billionaire or because he’s the owner of the Mavericks or because of his celebrity appearances on television shows such as Shark Tank.
By contrast, the defense will try to expose those who are biased against their client because he is too rich or too flashy, in an effort to have them booted from the trial.
“Every juror who walks into that courtroom will have an opinion of Mark Cuban,” says Kimberly Priest-Johnson, a former federal prosecutor and now a Dallas lawyer who specializes in white-collar criminal defense.
“Most people love him or hate him, but very few people are neutral about him,” she says. “Mark Cuban is a polarizing figure and both sides need to deal with that in jury selection or they will lose this case.”
Spencer and Breaux agree, noting that the lawyers will be trying to sniff out “sleeper jurors” who don’t readily admit bias during public questioning but may secretly harbor ill feelings that could influence them during jury deliberations.
Experts following the case say Cuban will want jurors who are well-educated and have an understanding of how the market works since Cuban’s counsel will provide a fairly technical defense to argue that Cuban held no liability under the misappropriation theory.
On the other hand, the SEC will want jurors without a high level of sophistication, experts say, because they could be more likely to take the government’s word as the authority figure in complicated financial matters such as this dispute.
A few dozen citizens from Dallas and surrounding counties have been summonsed to jury service tomorrow, but they are not told any details of the case.
Judge Fitzwater will provide the lawyers for the SEC and Cuban with the jurors’ names and basic information, including age, gender and ethnicity shortly before the start of court.
“You can bet that both sides have people sitting at keyboards ready to check LinkedIn, Facebook and Google for any public information about the jurors,” says Breaux.
Judge Fitzwater said at a pretrial conference last week that he plans to question jurors extensively. While the judge didn’t specify his questions, lawyers say he will quiz the potential jurors about their knowledge of the case, their attitudes about Cuban and whether a three-week trial would present any hardships.
Each side will get 10 minutes to ask their own questions.
“You can’t waste time with talking about how you spent your summer vacation,” says Tom Melsheimer, a partner at Fish & Richardson and one of Cuban’s lawyers. “You have to get right to the key issues of whether anyone has come to court with strong opinions about the case or the parties.”
Each side will have three peremptory strikes. Cuban’s lawyers asked Judge Fitzwater to consider giving prospective jurors lengthy written questionnaires. The Northern District chief justice denied the request, but he invited the lawyers to submit questions he should ask during voir dire.
The SEC submitted 24 itemized questions, including whether the potential jurors have any impressions of the SEC or whether they have ever followed Cuban’s blog postings.
Lawyers for Cuban proposed 58 questions. Most of the defense’s inquiries have to do with juror opinions of their client and their knowledge of stock trading.
Experts following the case say Cuban’s team wants jurors who are well-educated, have an understanding of how the market works and have the ability to understand its technical defense that Cuban held no liability under the misappropriation theory.
On the other hand, the SEC want jurors with a deep respect for authority and who believe that it is the government’s job to make sure that everyone abides by the rules, including billionaires.
“The [defense] needs somebody who really has the ability to slice that onion pretty finely,” says Jeff Ansley, a former SEC lawyer who is now a partner at Bell Nunnally. “For people who don’t have a high level of sophistication, when they hear ‘I’m screwed, now I can’t sell,’ it’s all they need to hear.”
For those who are more sophisticated, Ansley added, they will be more willing to accept the technical argument that the information was not confidential to agree with.
“All technical defenses require essential more intellectual horsepower than what the government is looking for in the jurors,” he said.
Billionaires’ Insider Trading Trial Starts Monday
By Natalie Posgate and Mark Curriden
Staff Writers for The Texas Lawbook
(September 26) – Dallas Mavericks owner Mark Cuban was playing in the Michael Finley Charity Golf Tournament in June 2004 when he received an email from the chief executive officer at Mamma.com.
“Call me ASAP,” CEO Guy Fauré wrote to Cuban, who was the Canadian web search technology company’s largest investor.
The eight-minute telephone conversation that followed is at the heart of one of the highest profile and possibly most expensive individual insider trading cases the U.S. Securities and Exchange Commission has ever taken all the way to trial.
After more than a half-decade of legal wrangling, the SEC’s long and tumultuous battle with Cuban, a self-made Dallas billionaire, businessman and television celebrity, officially goes to trial in federal court in Dallas Monday.
The SEC claims Fauré gave Cuban confidential insider information that the company planned to announce a private investment in public equity offering (PIPE) to targeted investors and that Cuban, upon learning about it, almost immediately sold his six percent stake in the company, avoiding an estimated $750,000 in potential losses.
Cuban claims the information he received wasn’t confidential, that he made no commitment to keep it confidential and that he made no agreement to not sell based on information he received, which are three key elements the government must prove in making its case. In addition, Cuban says he had no fiduciary duty to Mamma.com because he did not serve in any executive positions at the company.
“I’ve spent a lot of years and a lot of money to fight this because I won’t be bullied by the government,” Cuban said in an email to The Texas Lawbook. “I invite everyone to read all the evidence and documents in the trial and see for themselves.”
If the SEC scores a complete victory, the most the agency can hope to recover from Cuban is about $2.5 million in fines and disgorgement of profits, according to securities law insiders.
But they say that Cuban has likely already spent more than that in legal fees, as the three lawyers leading his defense team, including prominent Dallas trial lawyer Tom Melsheimer, reportedly bill more than $1,000 an hour each. The other two lawyers are Chris Clark of Latham & Watkins’ New York office and Steve Best of Washington, D.C.
“The reason so many cases brought by the SEC settle before trial is because most defendants do not have the money to fight the government,” says Ed Tomko, a former SEC enforcement lawyer and now a partner at the Dykema law firm in Dallas.
“That’s obviously not a problem for Mark Cuban, who has taken these charges against him very personally,” Tomko added.
The case is also seen by legal experts as critical in the SEC’s new approach to be more assertive against rich insiders who the regulatory agency believes have abused fundamental rules of fairness.
“This case is viewed as an aggressive prosecution by the agency, even approaching zealous enforcement,” says Arnold Spencer, a former federal prosecutor and now a partner at Akin Gump in Dallas.
“The SEC acknowledges that it is pushing the boundaries in what makes an insider trading case,” he says. “The SEC has been criticized for not being aggressive and the Cuban case is one small piece in a much larger agenda by the SEC to be tougher.”
Jeff Ansley, a former SEC lawyer and now a partner at Bell Nunnally & Martin in Dallas, says the federal agency has a lot at stake in its case against Cuban.
“Mark Cuban very well could be the highest profile celebrity the SEC has ever taken to trial for insider trading,” says Ansley. “If the government loses, its image would take a severe hit at a time when the SEC cannot afford another loss.”
The dispute comes down to this: What did Cuban and Fauré say to each other during that eight-minute call and did Cuban believe he was selling his 6.2 percent stake in the company based on insider information?
The SEC’s case primarily rests on Fauré’s testimony that he told Cuban on the phone that the information he was about to give him was confidential. Fauré claims that Cuban responded, “Yeah, uh-huh, okay.”
Fauré claims that as soon as he gave Cuban the news about the PIPE, the billionaire became angry and said, “Well, now I’m screwed. I can’t sell.”
The SEC says those comments by Cuban demonstrate that he knew he was receiving insider information and that he knew he had a fiduciary duty as an insider to not sell his interest in the company based on that insider information.
The government points out that Cuban, upset that his ownership stake would be diluted, called his broker and sold all of his 600,000 shares in the company by the end of the next day. The fact that Mamma.com shares plummeted more than nine percent after the PIPE was made public is evidence that the information Cuban received was materially important.
Lawyers for Cuban say Fauré’s statements are not to be trusted. They pointed out in court this week at the pretrial hearing that the SEC and defense counsel interviewed Fauré three times before he mentioned Cuban’s supposedly incriminating comments.
“He is the key witness in this case and he’s changed his testimony in a demonstrative way,” Chris Clark, a former New York prosecutor now representing Cuban, told U.S. District Chief Judge Sidney Fitzwater Wednesday at the hearing.
Clark pointed out that Fauré and Mamma.com were initially under the SEC’s microscope for possible stock manipulation. “He had motives to curry favor with the SEC,” he said.
The SEC has another problem: the jury will only hear Fauré’s videotaped deposition. Because he is a Canadian resident, he cannot be subpoenaed and is refusing to testify in person.
“Fauré is by far the government’s most important witness and it is a huge blow to the SEC that they cannot bring in their key witness to testify live,” says Ansley.
Ansley and other securities law insiders say that Cuban’s lawyers will be able to impeach Fauré’s credibility and the government is almost helpless to stop them because Fauré will not be there to refute their allegations – a point the SEC’s lead lawyer in the case, Jan Folena, made to Chief Judge Fitzwater this past week.
“The defense is going to say that Mamma.com was under investigation by the SEC and that Guy Fauré fabricated testimony in order to appease the SEC,” Folena said. “That’s damaging and prejudicial to our case.”
Folena told Chief Judge Fitzwater that Cuban’s lawyers had every right to ask Fauré about his motives for cooperating with the SEC during the video depositions, but chose to not do so and should not be allowed to raise his credibility now.
To which Clark responded, “We had no idea he wouldn’t come to the trial. He had voluntarily shown up at other SEC interviews.”
All that being said, legal experts agree that the star of the trial will be Mark Cuban. He is listed as a witness for government and the defense and there has been speculation that the SEC may call Cuban as its first witness.
“Cuban is the biggest factor in that courtroom – bigger than the lawyers, bigger than the judge,” says Tomko. “All the jurors are going to watch him – how he dresses, how he responds to testimony.”
Spencer and Tomko agree that Cuban needs to come across as likeable and as a thoughtful businessman who makes very deliberate decisions.
“This case is won or lost based on Cuban’s testimony,” says Spencer. “He could make the case for the defense, but he also could provide crucial testimony for the government.
“The jury’s decision will be off his testimony,” he said.
The SEC has several attorneys involved in the trial, but Jennifer Brandt is the only one from the Fort Worth Regional Office. The others are from Washington, D.C. including lead attorney Jan Folena and Kevin O’Rourke.
Jury selection starts Monday with opening statements expected Monday afternoon or Tuesday. The trial is slated to last three weeks. Chief Judge Fitzwater gave each side 22 total hours to present evidence – that includes direct and cross-examinations.
“At the end of the day, this is a very tough and very close case,” says Ansley. “The potential penalties are nothing to Mark Cuban. These are two sides with nearly unlimited resources.
“The amount of money the SEC and Cuban have spent over the past six years has been staggering,” he says. “But be clear, this case is going to go on and on until someone can’t get up.”
© 2013 The Texas Lawbook. Content of The Texas Lawbook is controlled and protected by specific licensing agreements with our subscribers and under federal copyright laws. Any distribution of this content without the consent of The Texas Lawbook is prohibited.
If you see any inaccuracy in any article in The Texas Lawbook, please contact us. Our goal is content that is 100% true and accurate. Thank you.