Court to Cuban: Good luck with that defense…

Mark Cuban

Here we go again: The Mark Cuban insider-trading case — the one we all had pleasantly forgotten about — is back. And in ruling to reinstate the SEC’s insider-trading lawsuit against Cuban on Tuesday, the appellate judges issuing the ruling may have presented the investor and sports mogul something of a damned-if-he-does, damned-if-he-doesn’t scenario (in a footnote, of course).

The background: The Securities and Exchange Commission sued Mark Cuban in late 2008, alleging that he sold his 6.3% stake in a web-search company after learning — confidentially, from the company’s CEO — that it was planning to make a private placement of shares at a discount. Cuban, irked that the move would surely drive down the stock’s value (it did), exclaimed that the phone call had “screwed” him by preventing him from selling the shares, the SEC said; then he’s alleged to have sought more information about the deal from the company, and sold his shares anyway. The SEC called it insider trading. (The WSJ has a good primer on the case here)

Cuban argues that what he did was fine — he says he was obliged only to keep the private placement confidential, but that he was free to trade on it, as the judges summarize his case. Last summer, a federal judge in Texas found the SEC’s evidence too flimsy to proceed and threw the lawsuit out. On Tuesday, the appellate court in New Orleans reversed that decision, reinstating the case and sending it on toward discovery and trial. It reasons that the facts

“provide more than a plausible basis to find that the understanding between the CEO and Cuban was that he was not to trade, that it was more than a simple confidentiality agreement.”

But judging from footnote no. 38, starting on the penultimate page of the ruling, the judges may be more than a little skeptical of Cuban’s defense. If, in fact, Cuban did receive the information with only an obligation of confidentiality, free to trade on it, it could still trigger insider trading implications, the judges seem to be saying.

“Such an arrangement would raise serious tipper/tippee liability concerns were it explicit. If the CEO knowingly gave Cuban material nonpublic information and arranged so he could trade on it, it would not be difficult for a court to infer that the CEO must have done so for some personal benefit—e.g., goodwill from a wealthy investor and large minority stakeholder.”

The court (which offers a primer on different kinds of insider-trading cases toward the beginning of its ruling) is careful to say it isn’t suggesting such an agreement was in place. But we’re pretty sure the district court will read that footnote as well, and it may not be good news for Cuban. Charles Landy, a former SEC enforcement attorney and securities lawyer at Pillsbury Winthrop in Washington, said much the same when we called him.

“If the CEO actually said to Cuban, here is some inside info you can trade on, and no one else can, I’d say both Cuban and the CEO are in trouble,” Landy said. “Cuban could not seriously believe — you wouldn’t believe, I wouldn’t believe — that a CEO would call us up … and give us license to trade on inside information.”

And so it goes — and goes, and goes. We wouldn’t be surprised if there’s been more ink spilled on this case — and legal bills racked up — for every dollar at stake than any other in recent memory. Mark Cuban, maverick that he is, vowed to fight tooth and nail, and so far is holding true to his word. The SEC, meanwhile, was backed up against the wall last summer as soon as the district court threw its case out, we were told by Fiona Philip, a Howery securities lawyer and former enforcement counsel to SEC chairmen Pitt and Donaldson.

As recently as a couple years ago, the SEC would have done its best to settle this case. But if it backed down on this one after it was thrown out, then its other insider trading cases would be in shambles — potential defendants would look to the Cuban case for years to come.

“It seems small, but it’s actually one of the cornerstones of the SEC’s caseload — if they can’t bring insider trading cases, you might as well pack it up and go home,” Philip says. “On both sides, it’s about reputation. … At this point, there’s no backing down on either side.”

Image source: Keith Allison via Flickr


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