November 18, 2008
On behalf of
Mark Cuban
RE: SEC Civil Action in the United States District
for the Northern District of Texas, Dallas Division
The SEC knows their case centers on one telephone conversation between two individuals- 4 years ago. The SEC claims there was an agreement between these parties to the conversation to keep certain information confidential. We interviewed Guy Faure, the former CEO of Mamma.com Inc., with whom the SEC claims Mr. Cuban made an agreement. We had a court reporter transcribe the interview. There was no agreement to keep information confidential. Here is a relevant excerpt from the interview with Mr. Faure:
CHRISTOPHER CLARK :
1) Q- We spoke earlier about you were telling Mr. Cuban in words or substance : “I have confidential information for you”.
A- Right.
2) Q- Do you recall anything Mr. Cuban said in response or reply to that statement by you ?
A- No, I do not.
The SEC knows this-they have the transcript, yet they brought the case anyway. Why? Do they have a different statement from Mr. Faure ?
Why did the SEC end their multi-year investigation of Mamma.com Inc. for alleged securities laws violations days before interviewing present and former Mamma.com Inc. executives about this matter? Was the timing a coincidence? We think not.
Any inquiries respecting this release should be directed to Stephen Best at Dewey & LeBoeuf LLP (202) 346-8735.
This is big stuff for a few reasons. As we predicted, Mark is fighting this on the grounds that he didn't have a "duty of confidentiality" and so therefore was free to trade on the information. "The SEC will likely rely on Cuban's conversation with the company about the possibility of him investing in their private placement. They'll claim that Cuban was trading on information he had a duty to keep confidential. Once you've got duty in place, the bar against trading kicks in. Basically, be careful what you agree to keep confidential because it may end up inhibiting your investment decisions in the future," we wrote.
Beyond that, we're surprised (but very glad) at how willing Mark Cuban is to use his blog to fight the case.
See Also:
Cuban's Persecutor Still Employed By The SEC
Cuban's Insider Trading Charge: Payback For Anti-Bush Movie
I don't see what the confidentiality has to do with it. He was given information before it was made public, and that constitutes an unfair advantage to whomever was on the other side of his stock trade.
God I hope so. Because as CEO, I will immediately call all my biggest investors the day before announcing shitty news -- and then they can't sell!
Not surprising that the SEC might have leaned on certain Mamma.com executives to roll over on a high profile scalp, Cuban, in exchange perhaps for dropping their Mamma.com investigation. The release suggests this, but even if such were true it does not shock me as my understanding is it is a common prosecutorial tactic.
Not clear if Cuban will be contesting whether Faure said something along the lines of: "I have confidential information for you". This release appears to suggest not, but it is inconclusive.
Key question: if someone says that to you ("I have confidential information for you") and you don't say something along the lines of "don't tell me, I don't want to hear it" or "I don't agree to keep it confidential" and instead stay on the line and listen, have you impliedly agreed (or agreed by your actions rather than words) to maintain confidentiality. That might be a hard argument for the SEC to win if Faure agrees that Cuban never stated assent or directly agreed to keep the information confidential (which is more what the emails in the SEC complaint suggested).
Getting a bit lost in all this is how sloppy Mamma.mia acted. They should have made sure they had a written confidentiality agreement in place signed by Cuban before revealing their confidential financing plans.
But I haven't been in law school in a while...
In these cases, the tipper is usually someone who has broken his or her fiduciary duty when he or she has revealed inside information. When the person receiving the tip uses it to trade
A key element of this kind of insider trading is that both parties are engaging in the deal knowing they will benefit. The usual example is the spouse of a CEO who goes ahead and tells a neighbor inside information. The chain of insider will spread across all three.
Here, however, it seems that Cuban wasn't tipped off and no one violated a duty by telling Mark Cuban about the PIPE offering. It seems more like it was carelessness. Cuban probably can't inherit the guilt of an innocent tip from the CEO.
We certainly don't want a rule that says a CEO can simply email or call his major shareholders with bad news that isn't public, and therefore prevent them from selling his stock.
That's a good point. Once you make that the rule, you'd have CEOs blasting their big shareholders news all the time, preventing them from moving their shares.
I'm left with the question of whether a duty is only imputed in a bad-faith, tipper-tippee scenario, or even in an innocent, strategy-discussion scenario. I can't be bothered to check, so hopefully some anonymous commenter who sounds reliable will let me know.
He posted elsewhere he likes to own 5% of a company so he would be privy to inside details.
He betrayed fellow shareholders like me by trading his huge position with info he knew but I did not.
Cuban is no hero, he got mad and ran. I hope the SEC sticks to their guns and sees this through. In any case Cuban will throw more money at defending this charge than he would have lost had he stuck it out with Mama.
Don't forget he bought his MAMA share in the $4 range.
Greed and anger. Angry billionaires generally get what they want and rules are secondary.
Absolutely wrong.
As CEO I will provide non-public information, on say future estimates, to my large shareholders the day before I announce, say big writedowns on goodwill.
Investors are then locked. If they sell, I call the SEC to nail them and we all get to go to court on the government tab.
Please please please Chris Cox: Give me the chance to do this, you insufferable twit.
Typically, a good lawyer like Clark would not be trying his case in the press - it previews the defenses for the government without any upside. Brendan Sullivan has said he never speaks to the press about defenses or strategies. You want the government to guess about your strategy. It is slightly different here. First, there is a political angle to this. With a new administration coming in, presumably you're getting a new SEC Chairman and even new commissioners, so Cuban wants to give the new people political cover to say "this was a trumped up and politically motived case" so we will settle what otherwise looks like Martha for a token sum. Second, Cuban has other interests to protect in the immediate term - the Cubs. MLB owners were already weary of him and they need to approve his purchase of the Cubs. Even if Cuban is the highest bidder, Zell needs ownership approval. This case gives the owners great cover for torpedoing the bid. So Cuban and his team are coming out aggressively to plant the seed that this is a bogus charge made by someone with an agenda. The hard line owners who hate Cuban probably won't care, but those on the fence could be drawn back to accepting his offer if they believe this is nonsense.
Rarely does a media trial work for the defense, but the Duke lacrosse case is a good example of the rare times when you want to do it (the Duke players could not afford to wait for a trial; even if they were acquitted, it would be chalked up to their high-priced lawyers). The Duke players' defense was to go on the offense and clear their names before the case got off the ground.
I'm inclined to think witch hunt here.
And what I said is that I will provide private information about something other than what is being made public in order to lock in the shareholders.
Perhaps this was not clear. Pretend there are 2 independent pieces of info material to the biz:
1. Sales are going to be bad this Q.
2. I am going to do a PIPE.
I can lock my shareholders by telling them #1 privately. Then I announce #2.
I have not announced the private information. They are still locked. I then do the PIPE deal at a higher number than I would have otherwise because my suckers ^H^H^H^H^H shareholders were locked.
I haven't read a single convincing defense of why he's innocent. Mr. Cuban defending himself on his blog is completely inappropriate, in my opinion, and flies in the face of our justice system. Whether or not he has a confidentiality agreement doesn't matter. He knew about the PIPE before the information was public and he sold the shares based on that information BEFORE the information was public. Case closed. I fail to see how anything could change that conclusion. Perhaps he's the target of a witch-hunt. Perhaps he's caught up in a larger power struggle. It doesn't change the facts of the case.
And the situation discussed above about creating a situation where CEOs could lock-up major investors by telling them bad news before its publicly released is nonsense. And besides, the CEO doing that would be violating reg FD. Once that particular information is released publicly, investors are perfectly able to trade on it. Nobody is locked up unfairly. Which is the way it should be, because it creates a FAIR market based on equal access to information! Mark Cuban selling his stock was asymetrical information flow.
FNP says case closed! Facts be damned, his opinion is law!
retarded
See my example above. You can lock them (which is why the SEC regs are more complicated.)
2) I think it's reasonable to assume that the shares were sold before the PIPE info was public, otherwise the SEC would have no case whatsoever and this whole issue would be moot.
Those are facts as I understand them and the only thing I asserted in my post. If I'm wrong, please correct me. What I'm saying is that if those two things are true, then nothing else matters.
There is no reason to resort to name calling. The anonymity of the internet doesn't give you the right to be a douche.
By acknowledging the conversation, he admits he had inside information.
That is defined as material, in that if it were known in the market it would affect the price of the stock.
So he is a liar, and he is implicating himself.
And what others are saying is that you have an imperfect understanding of the law. You cannot simply call somebody up, tell them a private fact and then lock them up from selling. (Think about the ramifications of that!)
The law states:
"Under Rule 10b5-1, the SEC defines insider trading as any securities transaction made when the person behind the trade is aware of nonpublic material information, and is hence violating his or her duty to maintain confidentiality of such knowledge."
The capital markets are based on transparency and if you don't think Cuban violated that, then I guess you see nothing wrong. Cheating harms all of us. At least Martha Stewart could cook.
You accuse the writers of defending cuban while showing your own bias. And as JP has pointed out, you don't know what you are talking about.
That's a very valid point and I understand what you're saying. What I was trying to get at in my first post was wouldn't the person disclosing the private fact be in violation of reg FD then?
In ensuing days the Form 13g indicating Cuban's 6% stake came out and the stock jumped to $13 with a brief spike over $15.
It was an extremely low float issue and news of any kind had an impact.
Cuban actually posted a few times on the MAMA board on Yahoo! Finance and suggested to the community of posters how he planned to integrate Mamma Search in his properties. As I recall he wrote that own blog Blog Maverick as well.
He led fellow shareholders to believe he was all about Mamma and even assured those who asked how he had his own accountants look into the company before taking a stake.
How did he go from cheerleader to seller overnight?
His explanation after the sale was he hates PIPEs. Who doesn't? I certainly don't but I was not in a position to know one was forthcoming.
His exit so soon after claiming his plans for the product and how great the search engine was hurt my position.
That is the best I can do for an explanation.
...and I know all the disclaimers apply, buyer beware, blah blah......
----I don't like PIPEs either.---
He wrote about how his accountants vetted the company before buying in.
HE SOLD
HE'S GUILTY
PEROID
It's quite possible that he would be. But again, standards of proof are onerous and complicated, not to be hashed out after 4 years. (That was just stupid on the part of the SEC lawyers. But if the Norris email is for real, then it's clear that they're not the brightest bulbs in the box either.)
Truthfully, I think he'll settle (these things suck as distractions, and the cost won't hurt his bank account too much), but it does look a whole lot like political payback with the Norris email.
How is that possible when the number of shareholder's for any public company easily numbers in the thousands or tens of thousands, if not more than that?
I don't know what the legal rule for this is, but seems to me that the very act of announcing something to your shareholders is the equivalent of making that information public.
But if the chosen shareholders revealed the private information, then they are in violation of FD regs. And again, I can have the gov't do my dirty enforcement work (ie, no legal cost for the company to drag the shareholders into court.)
There really is a reason why this stuff is complicated. Cuban may be a jerk, but there are a whole lot of bigger jerks with the CEO title.
Yes that is true. Once you expose someone to inside info, there are a whole lot of regs that govern what they can do with that info.
How is that possible when the number of shareholder's for any public company easily numbers in the thousands or tens of thousands, if not more than that?
The strategy would be to lock up the large shareholders (ie, the ones that would really move a stock) which is much more manageable.
but seems to me that the very act of announcing something to your shareholders is the equivalent of making that information public.
However, announcing to a small number (say, Mark Cuban) is not making it "public", which I think is the cause of much consternation.
I too agree this is a bit fishy with regards to the Cubs and Cubans attacks on the SEC.
Also, even if the CEO said that the conversation was in confidence, it still has to create a fiduciary obligation between Cuban and the company. Breach of a private oral contract, even taken as true, is a bit thin.
Thank you being courteous. People like adrian who mask their failure to logically and politely convey their arguments by nastiness and name calling have no place on these boards, in my opinion.
I guess the essence of my argument is the disclosure of the information to Mr. Cuban is a separate issue from the insider trading allegation. Any CEO that selectively discloses material information without a timely 6-k filing is in violation of reg FD. This law, and not the insider trading law, is meant to prevent the scenario described above about the CEO locking his shareholders out from selling.
But as I understand it (while I'm not a securities lawyer, I do have a significant amount of professional experience in the matter) insider trading is committed when the person making the trade does so based on material non-public information. How the information is obtained is irrelevant and is covered under a separate securities law (Reg FD). My point is Mr. Cuban has admitted to making the trade based on the information that the company would be issuing a PIPE. That information was non-public at the time and it was material.
And putting aside the details here, I think its pretty clear that Mr. Cuban violated the spirit of the insider trading law, even if he can argue the technicalities. The buyers of the shares he sold were screwed because he knew information they didn't know. Or more to the point, information they couldn't have known about.
That's not quite true. The purpose of Reg FD in this context is to compel contemporaneous disclosure to the public of any material non-public information. A violation of FD by the company is a separate issue. But any insider trading charge must be based on the intent of the insider. What the confidentiality issue goes to is whether Cuban misappropriated material nonpublic information. But again, it appears to be a he said - he said situation, which would not bode well for the SEC.
And sure, I know all about Martha, but she's not the business person Cuban is by a long shot.
Cuban should roll the dice and fight this to trial. Ferrara doesn't have a great track record of trying SEC cases (Shell paid a huge settlement, for example though no individual was charged). Clark did a good job as prosecutor in the Rigas trial, though it is unclear how aggressive he is on the defense side. Cuban should have hired a very aggressive defense attorney like Brendan Sullivan, John Dowd, Robert Morvillo, Ted Wells, or Reid Weingarten. Guys like Ferrara and Bill McLucas tend to roll over for the government.
This is anything but an open and shut case for the SEC and I'd say MC has better odds of beating this than not. Is this on InTrade?
LOL. Imagine the inside trades that would be possible there!
We shouldn't be wasting time on this. It's $750K, who cares? The rest of the market is getting slaughtered, why should the SEC & media waste time on this rich, obnoxious punk?
This would end the SEC...they would be abolished if Cuban wins.
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