Securities Law - SEC Appeals Adverse Mark Cuban Ruling

Earlier this year, see below entry of September 18, 2009, the Northern District of Texas dismissed the SEC’s complaint, alleging insider trading, against Mark Cuban the colorful owner of the Dallas Mavericks basketball team. The undersigned respectfully disagrees with the ruling of the District Court, as does the SEC.

Mamma.com, a public company decided to have a public offering of common stock. A few days before the public announcement, the CEO decided to call Mark Cuban, a 6% stockholder of Mamma.com to determine if he wished to buy stock in the offering. Before telling Cuban, the CEO asked Cuban to keep the information confidential and Cuban agreed. When Cuban learned from the CEO of the common stock offering, he said he was not in favor of the offering because it would dilute current stockholders and said “Well, now I’m screwed. I can’t sell.” A couple of days later Cuban sold his entire 6% holding of common stock. By selling, Cuban avoided a loss of Seven Hundred Fifty Thousand Dollars ($750,000.00). Cuban did not inform Mamma.com that he was going to sell his stock.

The SEC filed a civil law enforcement action charging Cuban with claims under Section 21(d), 21(e) and 27 of the Securities Exchange Act of 1934. Cuban filed a motion to dismiss on the grounds that he did not agree he would not sell.

The District Court granted the motion to dismiss and the SEC appealed to the Fifth Circuit. The SEC argues in its brief on appeal that Cuban misused confidential information in a breach of a duty established by the United States Supreme Court in U.S. v. O’Hagan, 521 U.S. 642 (1997), which adopted the misappropriation theory of insider trading. Under that theory a person commits fraud “in connection with a securities transaction, and thereby violates Section 10(b) and Rule 10(b)(5), when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information.” p. 652. Following that decision, the SEC issued Rule 10(b)5-2(b)(1), which in part states that a duty of trust and confidence exits when “a person agrees to maintain confidentiality of information.” Cuban had argued that the SEC did not allege in its complaint that he agreed not to trade.

In its brief, the SEC also argues that the District Court failed to give proper deference to Commission Rule 10(b)5-2(b)(1). which provides that an agreement to maintain information in confidence gives rise to a duty that makes trading on confidential information without disclosure deceptive. The SEC stated because that interpretation of Section 10(b) is reasonable the Rule is entitled to Chevron deference. Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) which held that courts must defer to the Commission’s interpretation of Section 10(b) if Congress has not “unambiguously forbidden [the interpretation] and it is *** based on a permissible construction of the statute.”
The SEC also argued that the District Court’s interpretation is incorrect even apart from Rule 10(b)5-2(b)(1). According to the SEC, trading on material non-public information after agreeing to maintain it in confidence is deceptive under the general terms of Section 10(b) and Rule 10(b)(5).

In the writer’s opinion, if the case were to be decided by the Second Circuit Court Of Appeals, it would be reversed. To the writer, the issue is simple. Cuban’s first reaction was correct. “Well now I’m screwed. I can’t sell.” The information belonged to the Company. The CEO called Cuban for a proper corporate purpose to sell stock to Cuban. The Company did not intend to give the information to Cuban. Cuban knew no gift was intended. Yet, he took the information for personal profit. That opportunity was not given to the stockholders holding the other 94% of the Company.

The Fifth Circuit however has few Securities cases and the SEC could lose.

The SEC has submitted a well-written brief. The authors of the brief are David M. Becker, General Counsel, Mark D. Chan, Deputy General Counsel, Jacob H. Stillman, Solicitor, Randall W. Quinn, Assistant General Counsel and Michael L. Post, Senior Litigation Counsel.

Cuban is represented by Lyle A. Roberts, Dewey & LeBoeuf, L.L.P.

Edward X. Clinton, Sr.
Copyright 2010