Billionaire Mark Cuban found not liable in SEC insider suit

October 16, 2013 11:13 AM

Mark Cuban, the billionaire owner of pro basketball’s Dallas Mavericks, didn’t engage in insider trading nine years ago, a federal jury decided in a case brought by the U.S. Securities and Exchange Commission.

The jury of two men and seven women in Dallas deliberated for less than a day before reaching its verdict in the trial that started with their selection on Sept. 30.

The SEC accused Cuban, 55, of using inside information from the chief executive officer of a Canadian Internet company to avoid a $750,000 loss in 2004. He denied the allegations.

Holding 6.3 percent of the outstanding shares, Cuban was the biggest stockholder in the company once known as He sold his stake for $7.9 million after learning from then-CEO Guy Faure that the company was planning a private investment in public equity, or PIPE transaction.

The stock sale would have diluted the value of Cuban’s holdings.

To win its case, the SEC was required to prove seven elements, among them that Cuban had received material, non- public information about the PIPE, that he had agreed to keep that information confidential and not act on it, and that he acted on it without telling the company he planned to do so, according to the instructions jurors received from U.S. District Judge Sidney A. Fitzwater.

SEC Argument

“Find Mark Cuban liable,” the SEC’s lead trial lawyer, Jan Folena, told jurors in her closing argument yesterday. “His trade was downright illegal. Of all the investors in the market, Mr. Cuban knew better.”

Thomas Melsheimer, Cuban’s lawyer, countered in his closing argument that the PIPE information was publicly known before Cuban sold his shares.

“Mr. Cuban made no agreement to keep anything confidential,” Melsheimer told jurors. “Mr. Cuban made no agreement not to sell his stock. Mr. Cuban disclosed his intent to sell his stock. Mr. Cuban acted like a man with nothing to hide because he had nothing to hide.”

Faure, in recorded testimony played for the jury, said he told Cuban the PIPE information wasn’t public and that their eight-minute phone conversation in June 2004 ended with the investor saying, “Now I’m screwed. I can’t sell.”

Cuban’s Account

While Cuban, in his own trial testimony, didn’t dispute the two had spoken, he said he could not recall specific details of the discussion and that he’d not have made a verbal promise of confidentiality.

He also denied that the PIPE alone motivated the liquidation of his shares, which was completed within a day of his conversation with Faure and prior to the private placement.

Cuban said he was concerned the company was involved with stock promoter Irving Kott who, a month earlier, had pleaded guilty to charges he concealed his ownership interest in a discount brokerage firm.

The Kott conviction influenced his thoughts about the PIPE, he said.

“It was an indication to me that the company was a scam,” Cuban said of

In addition to Faure, the SEC presented the testimony of Chairman David Goldman, who told the court the company’s board was concerned about how it’s biggest shareholder would respond to being told of the PIPE plan.

The board was worried Cuban might “flog us on his blog,” the chairman said.

Goldman acknowledged writing an e-mail message to the board on June 28, 2004, summarizing, among other things, what he knew of the phone call between Cuban and Faure earlier that day.

“As anticipated he initially ‘flew off the handle’ and said he would sell his shares (recognizing that he was not able to do so until we announced the equity),” he wrote of Cuban.

In his testimony, Goldman said, “I had not anticipated he would sell before release of the information.”

On cross-examination, the chairman said he never asked Faure to obtain a non-disclosure agreement from Cuban. He also testified Faure didn’t tell him Cuban had agreed to keep the June 28 conversation confidential.

The regulator also presented testimony from Arnold Owen, the investment banker who said in an SEC interview that Cuban called him and learned details of the private placement plan. Owen said he told Cuban news of the the PIPE would “hit the tape” the next day.

In his own testimony, Cuban said he told Owen he planned to sell his shares.

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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