Mark Cuban, the billionaire owner of the Dallas Mavericks, should face insider-trading allegations that were dismissed last year by a lower-court judge, securities regulators told an appeals court.
The U.S. Securities and Exchange Commission sued Cuban in 2008 for allegedly 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. U.S. District Judge Sidney A. Fitzwater in Dallas threw out the case in July 2009, finding flaws in the government’s claim.
Cuban, who announced plans to bid on the Texas Rangers baseball team last month, has denied any wrongdoing. He claims he had no legal obligation not to sell the stock after the head of Mamma.com 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 district court was not correct and should be reversed,” Randall Quinn, the SEC’s lawyer, told a three-judge panel in oral arguments at the U.S. Court of Appeals in New Orleans today. The judge didn’t give “proper weight” to an agreement by Cuban not to sell stock after receiving confidential information, Quinn said.
The appellate judges didn’t indicate when they would make a decision.
Sale of Stake
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 Guy Faure, then Mamma.com’s chief executive, the SEC alleged. The stock fell 8.5 percent on June 30, 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.
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.”
Fitzwater dismissed the case, ruling that Cuban didn’t agree not to trade on the information, only to keep it confidential.
“The SEC has failed to allege that Cuban undertook a duty to refrain from trading on information about the impending” private placement offering, Fitzwater wrote in his opinion.
The U.S. believes that Cuban “explicitly agreed not to use the information,” Quinn, the SEC lawyer, said today. “He agreed not to use it and he used it. That’s deception,” he told the judges.
Mamma.com was never defrauded and Fitzwater’s dismissal of the SEC suit should be upheld, Cuban’s attorney Lyle Roberts told the appeals court today. The judge had correctly looked at “the four corners of the complaint,” he said.
“You don’t think there is a little fraud here?” U.S. Circuit Judge Carolyn D. King asked Roberts at today’s hearing. “Fraud in the air, so to speak?”
“No, your honor,” Roberts replied.
“Somebody lost $700,000 because he didn’t have that same information, right?” U.S. Circuit Judge Patrick E. Higginbotham asked Roberts at the hearing.
The judge was “technically correct,” Roberts told Higginbotham. “What you’re describing is financial unfairness. You’re not describing fraud.”
Cuban’s lawyers claim the Dallas entrepreneur didn’t need the company’s permission to sell. They say he kept the information private and fully disclosed his stock sale to regulators after the fact, as required by securities laws.
Cuban wasn’t an officer or corporate insider who owed the company a duty to disclose, Roberts argued today. Courts have uniformly rejected the idea that agreeing to keep something confidential triggers a fiduciary duty, he said.
“The law does not allow people just to slip into fiduciary relationships,” he said.
Five law professors filed a friend-of-the-court brief urging the New Orleans appeals court to reject the government’s bid to reinstate Cuban’s insider trading case. They accuse the SEC of trying to “significantly expand” the legal definition of insider trading to include any act of “financial unfairness” by an investor who may not owe any fiduciary responsibility to the company.
If securities regulators succeed in stretching the scope of insider trading, “anyone who receives confidential information regarding a public company is potentially at risk of becoming a target of an SEC investigation or litigation,” Nicholas Porritt of Akin Gump Strauss Hauer & Feld LLP in Washington said in the law professors’ brief.
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. Cuban’s lawyer told a Texas bankruptcy judge last week that he plans to bid on the Texas Rangers, when the Major League Baseball franchise attempts to emerge from bankruptcy at an auction set this week in federal court in Fort Worth, Texas.
The case is SEC v. Cuban, 09-10996, 5th U.S. Circuit Court of Appeals (New Orleans).