SEC Loses as Mark Cuban Triumphs in Insider-Trading Trial
The U.S. Securities and Exchange Commission was handed a high-profile loss in a low-stakes case with Mark Cuban’s trial lawyers outmaneuvering those for the regulator.
A federal jury in Dallas yesterday rejected SEC claims that Cuban engaged in insider trading when he sold his stake in a Canadian Internet company nine years ago to avoid a $750,000 loss. Jurors found the information Cuban acted on wasn’t confidential and that he hadn’t promised not to trade on it.
The jury of two men and seven women, in a trial that began with their selection on Sept. 30, deliberated for less than five hours before reaching a verdict.
“Not surprising,” Stuart Slotnick, a white-collar criminal defense lawyer, said of the SEC’s loss.
“They had a case with no confidentiality agreement,” Slotnick said in a phone interview. “They had a case without a live star witness. They had a case in which the jury had to listen to someone on a TV screen.”
The SEC’s case hinged in part on the prerecorded testimony of Guy Faure, the former chief executive officer of Montreal-based Mamma.com. Before selling his 6.3 percent stake in the company, Cuban had been the company’s biggest investor.
Jan Folena, the SEC lead trial lawyer in the case, called Faure a “key” witness for the government. Residing in Canada, Faure was beyond the agency’s subpoena power.
Jurors were shown a recording of questions he answered in a 2011 deposition, during which he recounted an eight-minute phone conversation in June 2004. Faure said he told Cuban confidentially that Mamma.com was planning a stock offering called a private investment in public equity, or PIPE, that would dilute the value of his shares.
“Now I’m screwed. I can’t sell,” Cuban replied, according to Faure.
“They couldn’t see him. They couldn’t assess his credibility,” Slotnick, a New York-based partner at Buchanan Ingersoll & Rooney PC who wasn’t involved in the case, said of Faure’s testimony. “They had Mark Cuban in person tell them what actually happened.”
In reaching their decision, jurors were required to answer seven questions, among them whether Cuban had received material, non-public information about the PIPE, whether he had agreed to keep that information confidential and not act on it, and whether he acted on it without telling the company he planned to do so.
Their answer to those questions was no.
Jane Rothman, 64, of Rockwall, Texas, a legal administrative assistant in an insurance office, served as the jury’s forewoman. She said in a phone interview that the jury did its due diligence in reviewing the evidence and reaching its verdict.
“The case was not as strong as persons with the SEC thought it was,” Rothman said. She declined to comment further, saying, “It wasn’t a single thing.”
Testifying live, Cuban told jurors that while he recalled the conversation with Faure, he couldn’t remember the details. Cuban said he didn’t have a verbal agreement to keep the information secret and not act on it.
He also said he told Arnold Owen, the Mamma.com investment banker handling the PIPE transaction, that he planned to sell.
“It’s one guy’s word against another guy,” said Alex Bourelly, a former SEC attorney who is now a partner in the Washington office of Baker Botts LLP.
Cuban, 55, owns the National Basketball Association’s Dallas Mavericks, the high-definition television network HDNet and the Landmark Theatre chain.
The former contestant on “Dancing With the Stars” is a regular on TV’s investor-themed program “Shark Tank.” In 1999, he sold Broadcast.com, a multimedia Web service he founded, to Yahoo! Inc. (YHOO) for $4.7 billion.
He sold his stake in Mamma.com, now Copernic Inc., for $7.9 million. At trial, Cuban said the PIPE plan was known before he cashed out.
His legal team was led by Thomas Melsheimer, a partner at Boston-based Fish & Richardson PC, a firm chiefly known for its intellectual property law practice. Melsheimer, a Texas lawyer since 1986, said this was his first securities trial.
“I was not brought into this case because of my intimate knowledge of securities law,” he said in a phone interview today, while acknowledging that other attorneys on the defense team had securities experience. “I was brought in because I knew how to try a case in Dallas, Texas.”
He’s also been Cuban’s litigator since 2000, he said.
Melsheimer said the trial win was attributable in part to Cuban’s live testimony and the Faure video.
“Mark’s testimony was by far the most important aspect of the case,” he said. “The SEC knew it. That’s why they called him in their case.”
Cuban, who is known for his courtside presence at Mavericks games and who has been repeatedly fined for criticizing NBA officials, may have defied juror expectations by being cool, calm and funny as a witness, Melsheimer said.
“The jury wanted to believe him,” he said. “I think they started out wanting to believe him.”
Like Slotnick, Melsheimer contrasted his client’s testimony with the Faure recording, which he called a “major weakness” in the government’s case.
“He’s the alleged victim to the fraud,” Melsheimer said. “If there was a fraud committed, it was committed against Guy Faure.”
While it may have been true that the SEC couldn’t compel Faure to testify, he could have come from Canada voluntarily, Melsheimer said.
“You would think that someone who’s the victim of a fraud would want to show up and testify and get redress for their injury,” he said.
At trial, Cuban’s lawyers presented evidence of a spike in trading volume that they said supported a claim the pending PIPE transaction was already known to investors. Citing that evidence, Cuban’s final witness, Erik Sirri, a former SEC official, said he believed the information was public before Cuban traded.
The share volume evidence was “a fairly clever way to give the jury a way to hang their hat on something,” Bourelly said.
“If you like the guy and want to find a way to see his side of the story, he gives you ample evidence to do it,” Bourelly said of Cuban.
Attorneys for the SEC also relied on the prerecorded testimony of former Mamma.com Chairman David Goldman. They called Owen, the investment banker, and Cuban as witnesses.
“We respect the jury’s decision,” John Nester, an SEC spokesman, said in an e-mailed statement yesterday. “While the verdict in this particular case is not the one we sought, it will not deter us from bringing and trying cases where we believe defendants have violated the federal securities laws.”
Nester declined to make Folena and co-trial counsel Kevin O’Rourke available for comment today.
Stephen A. Best, a lawyer for Cuban, said in an e-mailed statement yesterday that he believes the verdict “sends a message” that the SEC shouldn’t have brought the case.
“It’s not like winning a Mavs championship,” Cuban said after the verdict. His team won the NBA title in 2011. “They weren’t trying to use facts to convince the jury, they were trying to deceive the jury.”
George Canellos, co-director of the SEC’s enforcement division, said in an e-mailed statement that Cuban’s comments were “without merit and uncalled for.”
“Our lawyers acted in the finest traditions of government counsel and entirely appropriately in strongly advocating the position of the government in this matter,” Canellos said.
Bourelly, who wasn’t involved in the case, said the SEC must have believed it had a prosecutable case and at least circumstantial evidence of a violation.
“It’s hard as a government enforcer to walk away from a matter like that if you feel you’ve got sufficient evidence to go forward,” he said. “You can’t bring every case, so you try to bring some of the high-profile ones for deterrent effect. The problem is it backfires.”
Slotnick, the New York criminal defense lawyer, said Cuban paid far more to defend himself than the $750,000 loss he avoided by selling his Mamma.com stake.
While the regulator’s most-heavily publicized cases typically involve greater sums of money and broader schemes, Slotnick said, this case got attention because of Cuban’s fame. He called the trial a “one-off” and said the SEC won’t be damaged by it.
Bradley Bondi, a former SEC lawyer who’s now a partner at Cadwalader Wickersham & Taft LLP, said a loss for the SEC’s trial unit can be humbling.
The verdict “may be the result of jury nullification for a home-turf Maverick as opposed to a true loss on the merits,” he said.
The case is Securities and Exchange Commission v. Cuban, 08-cv-02050, U.S. District Court, Northern District of Texas (Dallas).
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