Investor Relations 101

[Tina]

Issue Date: IR Alert - July 20, 2009

Mark Cuban Beats the Rap: Billionaire Wins Bid to Get Insider-Trading Suit Dropped
(Bloomberg) Mark Cuban won his bid to toss the Securities and Exchange Commission's insider-trading lawsuit against him. U.S. District Judge Sidney A. Fitzwater in Dallas, in an order last week, granted Cuban's request to dismiss the case, without ruling on the merits of the SEC's accusations. He left room for the agency to refile its case, Bloomberg News reports.

In its Nov. 17 lawsuit, the SEC claimed Cuban promised during a 2004 telephone call with Mamma.com Inc.'s chief executive officer to keep confidential a planned private offering of company stock at a below-market price. Later that day, Cuban avoided more than $750,000 in losses by ordering the sale of his 6.3 percent stake in the Montreal-based Internet search company, the agency said, report Bloomberg writers Thom Weidlich and David Scheer.

"The SEC has failed to allege that Cuban undertook a duty to refrain from trading on information about the impending PIPE offering," Fitzwater wrote in his opinion, referring to the so- called private investment in public equity offer.

"We are reviewing the court's ruling and weighing our options," said Scott Friestad, an associate director of SEC enforcement who's overseeing the agency's case against Cuban.

In his ruling, Fitzwater said the SEC didn't allege that Cuban agreed not to trade on the information, only to keep it confidential.

"While the SEC adequately pleads that Cuban entered into a confidentiality agreement, it does not allege that he agreed, expressly or implicitly, to refrain from trading on or otherwise using for his own benefit the information," the judge wrote.

The judge's ruling is "somewhat novel" in how it defines a confidentiality agreement, said John Sylvia, a litigation attorney at Mintz, Levin, Cohn, Ferris, Glovsky & Popeo PC in Boston. "Ordinarily, one would assume that if you agree to come under the tent, that agreement would implicitly entail not using that information as well," he said.

Sylvia, who's not involved in the case, said he's sending his partners a memo suggesting they amend confidentiality- agreement language to note it also prohibits trading on the information.

"I think the SEC now knows it will be a very difficult case going forward," Ralph Ferrara, a lawyer for Cuban, told Bloomberg. "What he did was refine the argument down in a very sophisticated way."

Cuban argued that the SEC's complaint failed to show he was barred from selling the shares and that the agency was trying to expand the definition of insider trading. Ferrara argued at a May 26 hearing that the alleged confidentiality agreement didn't make his client Mamma.com's "fiduciary," or someone required to act for the benefit of another.

"The goal of protecting the integrity of the securities markets and promoting investor confidence would be achieved just as effectively by enforcing duties of nondisclosure and non-use that arise by agreement as by enforcing duties that flow from the nature of the relationship between the information source and the misappropriator," Fitzwater wrote.

The government may not have effectively presented the most compelling argument, that "implicit in the duty of confidentiality is a duty not to trade," said Jacob Frenkel a former SEC lawyer now with Shulman, Rogers, Gandal, Pordy & Ecker PA in Rockville, Maryland.

"Because of the other theatrics that have surrounded the SEC-Cuban relationship, the SEC may just drop this case despite the fact that this decision belongs in the appellate court because it goes to the heart of the agency's application of insider-trading enforcement theory," Frenkel said.