SEC's Cuban Insider-Trading Suit Is Revived by Court

Mark Cuban, the billionaire owner of the Dallas Mavericks, must face insider-trading allegations by the U.S. Securities and Exchange Commission that were thrown out last year by a lower-court judge, an appeals court ruled.

The U.S. Court of Appeals in New Orleans overturned the lower-court ruling in a decision today. In a 2008 lawsuit, the SEC accused Cuban of trading on confidential information when he sold his stake in Mamma.com Inc., a Canadian Internet search company, just before it announced a private placement of shares.

Cuban argued he had no legal obligation not to sell the stock after Guy Faure, then Mamma.com’s chief executive officer, told him of the impending private offering of below-market shares in a 2004 telephone call. Cuban sold ahead of the deal, which diluted the company’s shares by 8.5 percent.

“The allegations, taken in their entirety, 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,” the appellate panel said.

The agency claimed Cuban agreed with Faure at the beginning of their call to keep the information confidential and told Faure after learning details of the plan, “Well, now I’m screwed. I can’t sell.”

The appeals judges stopped short of saying that a confidentiality agreement implicitly contains a duty not to trade and said the final outcome of the case depends on the evidence to be gathered.

‘Paucity of Jurisprudence’

“Given the paucity of jurisprudence on the question of what constitutes a relationship of ‘trust and confidence’ and the inherently fact-bound nature of determining whether such a duty exists, we decline to first determine or place our thumb on the scale in the district court’s determination of its presence,” the panel wrote in its decision.

Stephen Best, one of Cuban’s attorneys at Dewey & LeBoeuf LLP, said it appears the appeals court accepted the argument that a confidentiality agreement alone isn’t proof of wrongdoing.

“The uncontradicted record in this case is devoid of any information suggesting any agreement imposing a fiduciary-like responsibility on Cuban,” he said.

The SEC is “pleased” with the decision, spokesman John Nester said in a statement.

Avoided Losses

Cuban avoided $750,000 in losses by ordering the sale of his 6.3 percent stake in the Montreal-based company now called Copernic Inc. within hours of talking to Faure, the SEC alleged. The stock fell 8.5 percent on June 30, 2004, the first trading day after the private placement was announced, and 15 percent the day after Cuban’s sales were disclosed in a regulatory filing made public July 2, according to Bloomberg data.

U.S. District Judge Sidney A. Fitzwater in Dallas threw out the case in July 2009, ruling that Cuban didn’t agree not to trade on the information, only to keep it confidential.

“Under Cuban’s reading, he was allowed to trade on the information but prohibited from telling others -- in effect providing him an exclusive license to trade on the material nonpublic information,” the appeals judges said.

Cuban owns the HDNet high-definition television channel and the Landmark Theater chain. He made his fortune through the sale of Broadcast.com, the multimedia Web service he co-founded and that Yahoo! Inc. bought for $4.7 billion in 1999.

The next year, Cuban purchased the Mavericks from Ross Perot Jr. for $280 million, a record at the time for a National Basketball Association team.

The case is SEC v. Cuban, 09-10996, 5th U.S. Circuit Court of Appeals (New Orleans).

To contact the reporters on this story: Thom Weidlich in Brooklyn, New York, federal court at tweidlich@bloomberg.net; Joshua Gallu in Washington at jgallu@bloomberg.net.

To contact the editors responsible for this story David E. Rovella at drovella@bloomberg.net; Lawrence Roberts at lroberts13@bloomberg.net.

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