SEC AGAIN TAKES ON MARK CUBAN IN INSIDER CASE
c.2013 New York Times News Service
Mark Cuban has tussled with Bill O’Reilly, Donald Trump and an array of NBA referees.
Next up? The federal government.
The Securities and Exchange Commission’s insider trading trial against Cuban, the billionaire entrepreneur, opens in a federal courtroom in Dallas on Monday, the culmination of a five-year battle between him and the SEC. Cuban, 55, a reality TV regular best known for his courtside antics at games of the Dallas Mavericks, the basketball team he owns, is one of the few celebrities to land on the agency’s radar.
Cuban’s star power, coupled with the SEC’s renewed ambition for taking cases to court, underpins the importance of this trial.
After enduring its share of losses at trial and a public lashing for missing signs of the financial crisis, the agency is fresh off its most significant courtroom victory in recent memory with a win over Fabrice Tourre, a former Goldman Sachs trader at the center of a toxic mortgage deal. A victory in Cuban’s case might further embolden the SEC as it seeks to hold individuals accountable at trial, a policy championed by its new chairwoman, Mary Jo White.
For Cuban, who has a net worth pegged at $2.5 billion, the courtroom fight is not about the money. If found liable, he faces a fine of about $2 million. Having doled out at least that much in fines to the National Basketball Association, Cuban is instead fighting to clear his name and dress down an agency that accused him of trading on confidential information when dumping his stake in an Internet company.
Over five years and in three different courthouses, Cuban’s case has had many twists and turns. A judge dismissed the lawsuit in 2009 and an appeals court reinstated it a year later. This year, Cuban sought to delay the trial to accommodate what the SEC mocked as his “Hollywood production schedule” — a swipe at his commitment to film the latest season of the reality show “Shark Tank.”
Cuban has fired his own shots in the case, using his blog to criticize the agency for a “facts be damned” approach, suing it to uncover records about its investigation and even suggesting that the insider trading case stemmed from an SEC employee who questioned Cuban’s involvement in a documentary film that smeared “the good name of a patriot like President Bush.”
While the employee was fired, an inquiry by the SEC’s inspector general cleared the agency of any misconduct, concluding that the employee was not involved in the investigation of Cuban.
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The contentious back story will not figure into the trial, but Cuban’s feistiness very likely will. And that personality, which will enter the spotlight when Cuban takes the witness stand as expected, might sway a jury of Dallas residents who have largely embraced Cuban.
“He does things I never thought he’d do,” said L.T. Johnson, a Dallas resident and Mavericks fan. “He should be up in a box like the other owners, but instead he’s on the floor, with the players and fans.”
Cuban made his fortune on the eve of the dot-com crash in 1999, selling his startup, Broadcast.com, to Yahoo for nearly $6 billion. He bought the Mavericks months later, and now has co-ownership stakes in the movie chain Landmark Theaters, among other media companies.
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The SEC’s case traces to June 2004, when the Internet search engine company Mamma.com was planning a private offering of its stock. The company expected Cuban to balk at the deal, which was likely to hurt Mamma.com’s stock price and dilute the holdings of existing shareholders like Cuban.
Yet Mamma.com hoped to win over Cuban, who already owned 6.3 percent of the company’s shares. During an eight-minute phone call on June 28, 2004, Mamma.com’s chief executive, Guy Fauré, made his pitch for the private offering.
According to the SEC, Cuban agreed to keep the information confidential. And after becoming “very upset and angry” when learning about the private offering, the SEC said, Cuban declared: “Well, now I’m screwed. I can’t sell” the existing shares.
Fauré urged Cuban to consult the investment bank arranging the private offering, Merriman Curhan Ford, now Merriman Capital, before deciding. When Cuban spoke to a Merriman employee, according to the SEC, he learned “additional confidential details” about the deal.
One minute after the call with Merriman ended, Cuban ordered his stockbroker to dump his entire stake in Mamma.com. By unloading the shares just hours before Mamma.com announced the offering, Cuban avoided about $750,000 in losses.
More than four years later, the SEC accused Cuban of securities fraud. Since then, the SEC has argued that Cuban tried to “conceal his wrongful trading” and concocted “a cover story,” by sending an email to his broker saying, “I want to make sure I was 100 pct kosher on that trade.”
Cuban’s lawyers dispute those accusations.
“Mr. Cuban’s e-mail to his broker, which asked that the investment bank’s compliance department be consulted, obviously sought more scrutiny of his entirely proper trading, not to cover it up,” the lawyers, Christopher J. Clark of Latham & Watkins, Stephen Best of Brown Rudnick and Thomas M. Melsheimer of Fish & Richardson, said in a statement. They added that “far from concealing his trading, Mr. Cuban voluntarily spoke to the S.E.C. without an attorney when they called him about an unrelated” investigation into Mamma.com.
“We expect that when the facts come out,” the statement said, “Mark will be vindicated.”
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The defense has several factors working in its favor. For one, the judge assigned to the case, Sidney A. Fitzwater, has been skeptical of the SEC from the start.
Fitzwater dismissed the case in 2009, ruling that the SEC had to show two things: that Cuban agreed to keep the information confidential and that he agreed not to trade on it. The SEC’s complaint was “deficient” in proving the second, Fitzwater ruled, noting that Fauré never asked Cuban not to trade.
The 5th U.S. Circuit Court of Appeals reversed the dismissal a year later. Last March, Fitzwater allowed the case to proceed to trial, calling his decision “in some respects a close one.”
The SEC could face additional problems at trial as its case hinges on the testimony, and memory, of Fauré. There is no recording of Fauré’s call with Cuban. And Cuban does not recall the 9-year-old conversation.
To further bolster the defense, Cuban’s lawyers are likely to portray Fauré as unreliable.
During his initial interview with the SEC, Fauré did not mention that Cuban immediately agreed to keep the information confidential. It was not until his second interview with the SEC that Fauré recounted how Cuban said “something to the effect” of “um hum, go ahead” in response to hearing that Mamma had “confidential information” to share.
Cuban’s lawyers will most likely highlight the curious timing of Fauré’s additional testimony. Fauré, according to court records, changed his story about two weeks after learning that the SEC dropped an unrelated investigation into Mamma.com.
The lawyers will also stress that Fauré’s emails to Cuban did not mention a confidentiality agreement. Fauré chose not to pursue such an agreement, court records say, even though one of Mamma.com’s outside lawyers advised the company to obtain a signed contract from Cuban.
If Cuban escapes unscathed in the courtroom, his problems will very likely shift to the basketball court, where the season is poised to start. The Mavericks, champions in 2011, are coming off a disappointing season in which they missed the playoffs.