Cuban Can’t Claim ‘Unclean Hands’ in SEC Insider Trading Case, Judge Says
Mark Cuban, the billionaire owner of the Dallas Mavericks, can’t argue the U.S. Securities and Exchange Commission’s insider-trading case against him is mostly barred because the agency investigated him in an improper manner, a judge ruled.
U.S. District Judge Sidney A. Fitzwater granted the SEC’s request to remove Cuban’s so-called unclean hands defense in a decision today.
The defense is available “only in strictly limited circumstances” including when misconduct “results in prejudice to the defense of the enforcement action that rises to a constitutional level and is established through a direct nexus between the misconduct and the constitutional injury,” which Cuban hasn’t shown, Fitzwater wrote in his ruling.
The SEC sued Cuban in 2008, accusing him 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.
“This was a minor legal skirmish over whether we could bring this affirmative defense,” Lyle Roberts, a lawyer for Cuban at Dewey & LeBoeuf LLP in Washington, said in a phone interview.
Roberts said Cuban had brought a sanctions motion over the SEC’s conduct that could be renewed further along in the litigation.
Cuban argued in a Feb. 4 court filing that, in its investigation of him, the agency “engaged in egregious acts of misconduct” and conducted the probe “in an unfair, biased and improper manner.”
Cuban said the SEC was determined to bring an action regardless of what evidence it uncovered and it didn’t give him a fair opportunity to argue against such an action, which is typically allowed.
The SEC discouraged a key witness’s lawyer “from making the witness available to speak with Mr. Cuban’s counsel” and it threatened the witness with perjury, according to Cuban’s court papers.
Fitzwater said Cuban failed to allege facts that prejudiced his case to the level required for an unclean-hands defense.
For example, he said, Cuban didn’t allege that making the witness unavailable “resulted in any prejudice in his defense of this enforcement action much less prejudice that rises to a constitutional level.”
Similarly, Cuban didn’t allege he wasn’t able to get truthful evidence from the witness despite the perjury allegation.
The SEC argued the unclean-hands defense can’t be asserted against a government entity suing in the public interest and that the agency’s investigation wasn’t prejudicial against him.
Fitzwater said an unclean-hands defense isn’t barred “as a matter of law” in an SEC enforcement action.
In the case, Cuban argues he had no legal obligation not to sell his Mamma.com stock after Guy Faure, then the company’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 SEC claims 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.”
Fitzwater, the judge, threw out the case in July 2009, ruling that Cuban didn’t agree not to trade on the information, only to keep it confidential.
The U.S. Court of Appeals in New Orleans overturned Fitzwater’s decision in September, finding the SEC’s allegations “provide more than a plausible basis to find that the understanding between the CEO and Cuban was that he was not to trade.”
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.
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.
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 Securities and Exchange Commission v. Cuban, 08-cv-2050, U.S. District Court, Northern District of Texas (Dallas).
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