Cuban’s Expert Testifies That PIPE Information Was Public

Mark Cuban’s expert witness at his insider-trading trial testified the allegedly confidential information at the center of the U.S. Securities and Exchange Commission’s case wasn’t secret.

Cuban, 55, is in the second week of a trial in federal court in Dallas, defending against a lawsuit alleging he availed himself of non-public information to avoid a $750,000 loss on stock he held in a Canadian Internet company.

“I concluded that the information was public, that it was known to investors and that it was incorporated into the stock price of before Mr. Cuban traded,” defense witness Erik Sirri, who led the SEC’s Division of Markets and Trading from 2006 to 2009, told the 10-person jury yesterday. The trial began Sept. 30.

The SEC has alleged Cuban learned of plans to proceed with a private investment in public equity, or PIPE transaction, that day during a telephone conversation with then-Chief Executive Officer Guy Faure.

Sirri, now a professor of finance at Babson College in Wellesley, Massachusetts, testified there was a spike in trading of the Montreal-based company’s shares on June 28, 2004, before Cuban began liquidating his 6.3 percent stake in the company.

Cuban’s shares sold for $7.9 million, according to data compiled by Bloomberg.

Sirri told the court it was his opinion that that spike was likely caused by traders “acting on information transmitted by and through people” who were aware of the PIPE term sheet.

Confidential Information

Testifying via video recording earlier in the trial, Faure told the court he’d advised Cuban the information he imparted about the PIPE that day was confidential.

The billionaire owner of pro baskeball’s Dallas Mavericks, the Landmark Theatre movie house chain and the high-definition television network HDNet, has testified that while he recalls that there was a call, he doesn’t remember what was said.

Cuban also testified he wouldn’t have made a verbal agreement on confidentiality.

Prior trial evidence showed Cuban’s broker sold 10,000 shares in the after-hours market on June 28 and 590,000 shares during regular market hours the next day.

The PIPE was made public after the market closed on June 29.

Sirri said that on Friday, June 25, about “half a million” shares of were traded, which was close to the average trading volume in the stock. On June 28 during regular trading hours, that “spiked” to more than 9.2 million shares.

Sage Letterhead

Defense lawyer Christopher Clark showed Sirri a copy of the term sheet for the private placement, dated June 18, on letterhead from lead PIPE investor Sage Capital Growth.

That sheet, which wasn’t marked “confidential,” showed the transaction would close on June 28.

Sirri said that PIPE investors often short the stock and their activity in the market to “pre-borrow” those shares might have signaled to traders and other market participants that a PIPE was about to be announced.

The professor and former SEC director also identified for Clark a Internet message board posting, dated April 1, 2004, that said, “‘‘ALL SHOULD READ !!!! Private Placement coming imminent ... I know an insider dilution will take place to fund acquisitions. Stock could correct strong when news come [sic] out.’’

‘‘I would classify it in the group of things I call rumors,’’ Sirri said of the posting.

$900 an Hour

The professor told the court Cuban is paying him $900 an hour for his work as an expert and that he’s received $120,000 to $130,000 so far.

Sirri later faced cross-examination from Christian Schultz, an SEC attorney .

Illustrating the volume of web bulletin board traffic from which Sirri extracted the April 1, 2004, note about which he testified, the SEC lawyer pulled from a cardboard box and placed on a courtroom table two stacks of paper, each more than a foot tall, which he identified as a 2,917-page printout of the more than 15,000 posts made on the message board from April 1 to June 29, 2004.

‘‘It’s on page 125, correct?” he said of the item about which Sirri testified, to which the witness agreed.

Schultz also returned to the expert’s testimony that trading spiked before Cuban began his sell-off.

Six Spikes

Schultz showed Sirri and the jury a chart depicting more than six volume spikes in the first six months of 2004. The lawyer also pointed out that the stock’s price rose almost 5 percent in the first minutes of trading on June 28.

“You can’t say any of these spikes are not a function of hedge funds and day traders and mutual funds trading on the run using algorithms, can you?” Schultz asked.

Sirri said he couldn’t.

Shultz also revisited Sirri’s claim that details from the term sheet leaked into the market.

Sirri told the SEC’s lawyer he didn’t know who saw the term sheet outside of company officials, their investment banker and the six institutional investors in the PIPE.

“You didn’t identify any hedge fund or person that actually traded, correct?” Schultz asked.

“That is correct,” Sirri answered.

Jurors earlier yesterday heard recorded testimony from SEC investigator Alton Turner, who told of papers Cuban furnished to the regulator as it probed other possible wrongdoing at the company, that are now being used in the case against the billionaire.

Lawyers for both sides told U.S. District Judge Sidney Fitzwater they expect Sirri to be recalled to the witness stand when the trial resumes Oct. 15 and that he will be the last defense witness.

Fitzwater told the attorneys he anticipates closing arguments will begin that afternoon.

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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