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From Securities Regulation Daily, October 16, 2013

Mark Cuban not guilty of insider trading

By Mark S. Nelson, J.D.

Businessman Mark Cuban has been found not guilty by a jury hearing the SEC’s civil insider trading case against him. The SEC’s suit against Cuban in the federal court in Dallas alleged that he traded 600,000 shares or 6.3 percent (his entire holding) of Internet search engine Mamma.com ahead of a stock offering, thus avoiding $750,000 in potential losses. The court has now entered a judgment dismissing the case with prejudice (SEC v. Cuban, October 16, 2013, Fitzwater, S.).

Background. According to the SEC’s complaint, Mamma.com’s CEO was to invite Cuban to participate in a private investment in public equity (PIPE) transaction at the urging of investment bank Merriman Curhan Ford & Co. Mamma.com’s CEO was told to pitch the deal to Cuban by emphasizing the confidential nature of the PIPE deal so Cuban would know to keep the deal’s terms confidential.

During a phone call with Mamma.com’s CEO, Cuban allegedly agreed to keep their talk confidential. Cuban, however, allegedly got angry upon learning of the deal’s PIPE feature because of the tendency of PIPEs to dilute existing shareholders. Cuban allegedly said, “Well, now I'm screwed. I can't sell.” The CEO later emailed Cuban contact information to get more details of the PIPE deal. Within minutes of a follow-up phone call with the investment bank’s representative, Cuban allegedly told his broker to sell his entire Mamma.com stake. The SEC’s civil insider trading case ensued.

Jury verdict. The court instructed the jury on the seven elements the SEC needed to prove its misappropriation theory of insider trading against Cuban. Although the jury found that the SEC proved that Cuban engaged in conduct “in connection with the sale of a security” and that his conduct involved interstate commerce, the jury found the SEC did not meet its burden of proof on the remaining five elements of its case.

Specifically, the jury found the SEC failed to prove that Cuban got material, nonpublic information from Mamma.com about the company’s PIPE deal. Court records show that during deliberations, the jury asked the judge to clarify “Is there a ‘level’ of detail required” to show that information is public. The jury also asked if “any” information was sufficient or must “it be all information to make it public?” The judge merely directed the jury to review the court’s charge.

Court filings show that the SEC and Cuban’s lawyers had wrangled over the definition of “nonpublic” prior to the court’s jury charge. The SEC asked to include language tracking the Second Circuit’s Contorinis opinion. Cuban opposed this language on policy grounds and because Contorinis involved “a unique fact pattern” and the market here had more specific information of the Mamma.com PIPE deal than did Cuban. The jury charge ultimately included language similar to Contorinis.

The court’s jury charge, in part, defined “nonpublic” to mean: “On the other hand, the confirmation by an insider of unconfirmed facts or rumors—even if reported in a newspaper—may itself be inside information. Information from a corporate insider that is more reliable or specific than public rumors is nonpublic information despite the existence of such rumors in the media or investment community.” The court added that it was up to the jury to decide if this type of information is material, nonpublic information.

Pre-trial publicity. In the months leading up to his trial, Cuban had asked the court for more time to question prospective jurors to mute the impact of expected publicity. Cuban specifically wanted prospective jurors to fill out a written questionnaire. He also wanted both his legal team and the SEC to have 30 minutes to directly question prospective jurors. If Cuban’s questionnaire option were rejected, he still wanted both sides to get 60 minutes for direct questions. The SEC opposed Cuban’s request because it believed the court’s existing process was sufficient.

The district court said that both Supreme Court and Fifth Circuit precedents give trial judges wide discretion to conduct voir dire. According to the court, its existing process would protect Cuban’s rights. The court also distinguished two other cases that used juror questionnaires, including one that involved jailed former Enron CEO Jeffrey Skilling, because these cases were even higher profile and were criminal cases. The court also said in a footnote that it would have denied Cuban’s request even if the SEC had not opposed it.

The case is No. 3:08-CV-2050-D.

Attorneys: Dean Conway for the SEC. Lyle Roberts (Brown Rudnick LLP), Christopher J. Clark (Latham & Watkins LLP), and Thomas M. Melsheimer (Fish & Richardson P.C.) for Mark Cuban.

Companies: Mamma.com; Merriman Curhan Ford & Co.

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